SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One):
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 1998, OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to .
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Commission File Number: 0-25854
GFSB BANCORP, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 04-2095007
- --------------------------------------------- -------------------
(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
221 West Aztec Avenue, Gallup, New Mexico 87301
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (505) 722-4361
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Securities Registered Under Section 12(b) of the Exchange Act: None
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Securities Registered Under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. YES X NO .
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Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year. $8,362,813.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average bid and asked prices of such stock on
September 15, 1998, was $8.8 million.
As of September 15, 1998, there were issued and outstanding 1,107,261
shares of the registrant's Common Stock.
Transitional Small Business Disclosure format (check one):
Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Stockholders for Fiscal Year ended June 30,
1998. (Part II)
2. Portions of Proxy Statement for the 1998 Annual Meeting of Stockholders.
(Part III)
<PAGE>
PART I
GFSB Bancorp, Inc. (the "Company") may from time to time make written
or oral "forward- looking statements", including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
annual report on Form 10-KSB and the exhibits thereto), in its reports to
stockholders and in other communications by the Company, which are made in good
faith by the Company pursuant to the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such
as statements of the Company's plans, objectives, expectations, estimates and
intentions, that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's financial performance to differ materially from the
plans, objectives, expectations, estimates and intentions expressed in such
forward-looking statements: the strength of the United States economy in general
and the strength of the local economies in which the Company conducts
operations; the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Board of Governors of the
Federal Reserve System, inflation, interest rate, market and monetary
fluctuations; the timely development of and acceptance of new products and
services of the Company and the perceived overall value of these products and
services by users, including the features, pricing and quality compared to
competitors' products and services; the willingness of users to substitute
competitors' products and services for the Company's products and services; the
success of the Company in gaining regulatory approval of its products and
services, when required; the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking, securities and
insurance); technological changes, acquisitions; changes in consumer spending
and saving habits; and the success of the Company at managing these risks.
The Company cautions that this list of important factors is not
exclusive. The Company does not undertake to update any forward-looking
statement, whether written or oral, that may be made from time to time by or on
behalf of the Company.
Item 1. Description of Business
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General
GFSB Bancorp, Inc. (the "Company") is a unitary savings and loan
holding company that was incorporated in March 1995 under the laws of the State
of Delaware for the purpose of acquiring all of the common stock of Gallup
Federal Savings Bank (the "Bank"). This acquisition occurred June 29, 1995 at
which time the Bank simultaneously converted from a mutual to stock institution
(the "Conversion"), sold all of its outstanding capital stock to the Company and
the Company made its initial public offering of its common stock. The expenses
associated with the Conversion were charged to paid-in capital while $4.5
million of the net proceeds of $9.1 million from the public offering was used to
purchase all of the issued and outstanding stock of the Bank issued pursuant to
the Conversion with the remaining $4.5 million being retained by the Company.
This transaction was accounted for in a manner similar to a pooling of
interests, consequently no goodwill or other intangibles were recorded as a
result of this transaction.
Since the primary activities of the Company are those of the Bank, much
of the discussion herein pertains to the Bank, however, comparisons to total
assets, liabilities, etc. are based on the Company's
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<PAGE>
consolidated numbers. As of June 30, 1998, the Company had total assets of $123
million, total deposits of $69 million and stockholders' equity of $14 million
or 12% of total assets under generally accepted accounting principles ("GAAP").
The only subsidiary of the Company is the Bank. The Bank currently has no
subsidiaries.
The Bank is a federally chartered capital stock savings bank located in
Gallup, New Mexico. The Bank was founded in 1934 under the name the Gallup
Federal Savings and Loan Association. In connection with the Bank's conversion
from a federally chartered mutual savings association to a federally chartered
stock savings bank, the Bank changed its name to Gallup Federal Savings Bank.
The Bank's deposits are federally insured by the Savings Association Insurance
Fund ("SAIF"), as administered by the Federal Deposit Insurance Corporation
("FDIC").
The Company's business activities to date have been limited to its
investment in the Bank, loans made to the Bank for use in the normal course of
the Bank's business, and a loan made to the Gallup Federal Savings Bank Employee
Stock Ownership Plan ("ESOP") to enable the ESOP to purchase shares of the
Company's common stock in the initial public offering.
The Bank offers a variety of financial services to meet the needs of
the communities it serves. The Bank's principal business is attracting deposits
from the general public and investing those deposits, together with funds
generated from operations, to originate first mortgages on one- to four-family
residences in its market area. The Bank also originates a limited number of
multi-family, commercial real estate, construction, commercial business and
consumer loans. The Bank intends to materially increase its origination of loans
not secured by one- to four-family residences.
The principal sources of funds for the Bank's lending activities are
deposits, the amortization, repayment and maturity of loans, mortgage-backed
securities, investment securities and borrowings from the FHLB. Principal
sources of income are interest and fees on loans, mortgage-backed securities,
investment securities, and deposits held in other financial institutions. The
Bank's principal expense is interest paid on deposits and FHLB borrowings.
The Company's dividend payout ratios for the fiscal years ended June
30, 1998 and June 30, 1997, are 37.4% and 53.7%, respectively.
The Company operates from its main office located at 221 West Aztec
Avenue, Gallup, New Mexico.
Market Area and Competition
The City of Gallup, New Mexico is considered to be the Bank's primary
market area. McKinley County, New Mexico is considered to be the Bank's
secondary market. McKinley County is located in northwestern New Mexico, and
occupies a part of the Colorado Plateau called the San Juan Plateau. More than
half of the people in the County are Native Americans; including Navajos and
Zunis. McKinley County includes the trading and service center of Gallup and the
southeastern edge of the Navajo Indian Reservation. In January 1995, McKinley
County had a population of approximately 67,000. The Bank intends to expand its
secondary market area to adjacent counties, which will include a major portion
of Apachie County, Arizona and the Navajo Indian Reservation. However, recent
attempts to originate loans on the reservation have been stymied due to
regulatory barriers.
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<PAGE>
The general economy of Gallup is centered around the wholesale and
retail trade, public administration, manufacturing, transportation services,
tourism and mining. The production of Indian arts and crafts by smaller
businesses also constitutes a major part of the County's economic base. The
largest single employer in McKinley County is the Bureau of Indian Affairs.
During its sixty-four year existence, the Bank has focused on serving
its customers located in the New Mexico community of Gallup and surrounding
communities in McKinley County. Economic growth in the Bank's market area
remains dependent upon the local economy. In addition, the deposit and loan
activity of the Bank is significantly affected by economic conditions in its
market area. The Bank's principal competitors are financial institutions and
mortgage banking companies, many of which are significantly larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes principally from commercial banks, mortgage
brokers, banking and insurance companies. Its competition for deposits has
historically come from commercial banks. In addition, the Bank faces increasing
competition for deposits from non-bank institutions, such as brokerage firms and
insurance companies in such areas as short-term money market funds, corporate
and government securities funds, mutual funds and annuities. The Bank is one of
five savings associations and commercial banks having an office in McKinley
County. The Bank is the only savings association or commercial bank
headquartered in Gallup. The Bank also competes with three local credit unions
and several mortgage banking companies located outside of McKinley County.
Lending Activities
General. The Bank's loan portfolio consists of mortgage loans secured
by one- to four-family residences, and multi-family, commercial real estate,
construction, consumer and commercial business loans.
At June 30, 1998, the Bank's loan portfolio totaled $76 million. Loans
secured by first mortgages on one- to four-family residences totaled $56
million, or 74% of the Bank's loan portfolio at June 30, 1998. For its mortgage
loan portfolio, the Bank primarily originates fixed-rate loans with up to
15-year terms. As part of its asset liability strategy, the Bank recently began
offering more adjustable-rate loan products. In addition, the Bank sells
conventional one- to four-family fixed rate mortgage loans over 15 years in
maturity into the secondary market.
Analysis of Loan Portfolio. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the total loan portfolio (before deductions for loans in process,
loan participations, deferred loan origination fees and costs and allowances for
losses) as of the dates indicated.
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<PAGE>
<TABLE>
<CAPTION>
At June 30,
------------------------------------------------
1998 1997
----------------------- ----------------------
$ % $ %
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Type of Loans:
Residential .............................. $ 55,297 72.92% $ 36,716 70.58%
Commercial real estate ................... 14,750 19.45 11,827 22.73
Construction:
Residential ............................ 1,125 1.48 232 .44
Commercial ............................. 1,848 2.44 3,579 6.88
Commercial business ...................... 4,748 6.26 1,961 3.77
Consumer:
Savings account ........................ 955 1.26 1,113 2.14
Automobile and other ................... 2,839 3.74 1,618 3.11
Less:
Loans in process ....................... (1,755) (2.31) (1,383) (2.66)
Loan participations sold ............... (3,065) (4.04) (2,961) (5.69)
Deferred loan origination fees and costs (520) (.69) (341) (.65)
Allowance for loan losses .............. (387) (.51) (339) (.65)
-------- --------- -------- ---------
Total loans, net ......................... $ 75,837 100% $ 52,022 100%
======== ========= ======== =========
Type of Security:
------
Residential real estate
1-4 family ........................... $ 56,422 74.39% $ 36,948 71.02
Multi-family dwelling units .......... 908 1.20 2,741 5.27
Commercial real estate ................. 15,717 20.72 12,536 24.09
Commercial business .................... 4,722 6.23 2,090 4.02
Consumer:
Savings accounts ..................... 955 1.26 1,113 2.14
Automobile and other ................. 2,839 3.74 1,618 3.11
Less:
Loan participations sold ............... (3,065) (4.04) (2,961) (5.69)
Loans in process ....................... (1,755) (2.31) (1,383) (2.66)
Deferred loan origination fees and costs (519) (.68) (341) (.65)
Allowance for loan losses .............. (387) (.51) (339) (.65)
-------- --------- -------- ---------
Total loans, net ....................... $ 75,837 100% $ 52,022 100%
======== ========= ======== =========
</TABLE>
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Loan Maturity Tables
The following table sets forth the maturity of the Bank's loan
portfolio at June 30, 1998. The table does not include prepayments or scheduled
principal repayments. Prepayments and scheduled principal repayments on loans
totaled $7.5 million and $17 million, for the years ended June 30, 1998 and
1997, respectively. Adjustable-rate mortgage loans are shown as maturing based
on contractual maturities.
<TABLE>
<CAPTION>
Multi-family and Consumer and
1-4 Family Commercial Commercial
Real Estate Real Estate Construction Business Total
----------- ----------- ------------ -------- -----
(In Thousands)
Amounts Due:
<S> <C> <C> <C> <C> <C>
Within 3 months ............ $ 55 $ 287 $ -- $ 624 $ 966
3 months to 1 Year ......... 285 348 914 2,834 4,381
After 1 year:
1 to 3 years ............. 1,112 3,611 -- 1,321 6,044
3 to 5 years ............. 658 5,058 -- 1,398 7,114
5 to 10 years ............ 23,105 825 250 1,153 25,333
10 to 20 years ........... 20,311 5,529 1,687 1,210 28,737
Over 20 years ............ 8,280 -- -- -- 8,280
------- ------- ------- ------- -------
Total due after one year.... 53,466 15,023 1,937 5,082 75,508
------- ------- ------- ------- -------
Non-performing ............. 583 -- 123 2 707
------- ------- ------- ------- -------
Total amount due ........... $54,389 $15,658 $ 2,974 $ 8,542 $81,563
======= ======= ======= ======= =======
Less:
Loan participations sold.... (3065)
Allowance for loan loss..... (387)
Loans in process............ (1755)
Deferred loan fees.......... (519)
-----
Loans receivable, net..... $75,837
=======
</TABLE>
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<PAGE>
The following table sets forth the dollar amount, before deductions for
loans in process, deferred loan origination fees and costs and allowance for
loan losses, at June 30, 1998 of all loans due after June 30, 1999, which have
pre-determined interest rates and which have floating or adjustable interest
rates.
<TABLE>
<CAPTION>
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In Thousands)
<S> <C> <C> <C>
One- to four-family(1) ............... $47,070 $ 7,621 $54,691
Multi-family and
commercial real estate(1) .......... 12,570 3,870 16,440
Consumer and commercial
business ........................... 904 4,180 5,084
------- ------- -------
Total ............................ $60,544 $15,671 $76,215
======= ======= =======
</TABLE>
- ---------------
(1) Includes construction loans.
One- to Four-Family Residential Loans. The Bank originates
multi-family, commercial business, commercial real estate and consumer loans.
The Bank generally originates one- to four-family residential mortgage loans
without private mortgage insurance in amounts up to 80% of the appraised value
of the mortgaged property, or up to 95% if private mortgage insurance is
obtained to reduce the Bank's exposure to 80% or below of the appraised value of
the properties. To a lesser extent, the Bank makes loans on non-owner occupied
one- to four-family properties acquired as an investment by the borrowers in
amounts up to 80% of the appraised value of the property. In addition, the Bank
originates FHA and VA loans.
The Bank primarily originates fixed-rate mortgage loans for its loan
portfolio with up to 15 year terms. In addition, the Bank originates loans with
terms over 15 years for sale in the secondary market. The Bank offers various
loan programs with varying interest rates and fees which are competitively
priced based on market conditions and the Bank's cost of funds. Generally, the
Bank's underwriting guidelines for fixed-rate mortgage loans conform to FHLMC
and FNMA guidelines. In March 1995, the Bank began offering one-year
adjustable-rate mortgage ("ARM") loans which adjust annually based upon the
one-year treasury rate. The program is structured so that such loans generally
may not adjust more than 2% in any one year. The Bank will not originate loans
below the fully indexed rate. Generally, during periods of rising interest
rates, the risk of default on an ARM loan is considered to be greater than the
risk of default on a fixed-rate loan due to the upward adjustment of interest
costs to the borrower. The Bank will not originate ARM loans with negative
amortization or with initial "teaser" rates. The Bank also offers a variety of
loan products for low and moderate income housing. The Bank offers second
mortgage loans on one- to four-family residences if the Bank holds the first
mortgage loan for such property and the combined loan to value ratio will be 90%
or lower.
Commercial Real Estate and Multi-Family Loans. Since 1994, the Bank has
actively increased its origination of commercial real estate and multi-family
loans and expects to continue to do so. The Bank became involved in these types
of loans due to a perceived need in the Bank's market area and in an attempt to
increase the Bank's net interest margin. Commercial real estate and multi-family
secured loans are originated in amounts generally up to 80% of the appraised
value of the property. Such
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<PAGE>
appraised value is determined by an independent appraiser previously approved by
the Bank. The Bank's commercial real estate loans are permanent loans secured by
approved property such as churches, motels, small office buildings, retail
stores, small strip plazas, and other non-residential buildings. The Bank
generally originates fixed-rate commercial real estate loans with balloon
maturities of five years and with amortization periods of up to 25 years, and to
a lesser extent, adjustable-rate loans based on a margin over the New York prime
rate. At June 30, 1998, the Bank's largest commercial real estate loan consisted
of a $1,450,000 performing loan secured by a retail commercial property, of
which $480,000, has been sold to another bank as a non-recourse participation.
At June 30, 1998, the Bank's largest multi-family loan consisted of a $640,000
performing loan secured by two multi-family apartment buildings in Gallup, New
Mexico.
Loans secured by commercial real estate and multi-family properties
generally involve a greater degree of risk than residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties and the increased difficulty of evaluating and monitoring these types
of loans. Furthermore, the repayment of loans secured by commercial real estate
is typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced, the borrower's ability to
repay the loan may be impaired. The Bank intends to continue to emphasize
commercial real estate lending and accordingly, its credit risk may increase.
Consumer and Commercial Business Loans. In response to a perceived need
in the local community and to provide for diversification of its asset portfolio
and improved interest rate risk management, the Bank continues increasing the
amount of consumer and commercial business loans it originates. The Bank is
attempting to increase its level of consumer lending through new products, such
as home equity lines of credit, second mortgage loans and automobile loans, a
competitive pricing structure, promotional activities, and cross-selling
consumer products through its office, without incurring unacceptable credit
risk. The home equity lines of credit are made with adjustable rates with loan
to value ratios of 90% if the Bank has the first mortgage and 80% if it does
not. The Bank also offers automobile and other consumer loans offered primarily
on a fixed-rate, short-term basis. The underwriting standards employed by the
Bank for consumer loans include a determination of the applicant's payment
history on other debts and an assessment of the borrower's ability to make
payments on the proposed loan and other indebtedness. In addition to the
creditworthiness of the applicant, the underwriting process also includes a
comparison of the value of the security, if any, in relation to the proposed
loan amount. The Bank's consumer loans tend to have higher interest rates and
shorter maturities than one- to four-family first mortgage loans, but are
considered to entail a greater risk of default than mortgage loans.
The Bank intends to continue to actively increase its commercial
business loan originations so that they will equal approximately 10% to 20% of
the total loan portfolio. Revolving lines of credit, short-term working capital
loans, and term loans up to seven years are originated to meet the needs of
local small businesses. Some loans are unsecured, but the majority are secured
by inventory, equipment, accounts receivable, marketable securities, savings
deposits, real estate, personal guaranties, or a combination of these types of
collateral. Commercial business loans generally involve a greater degree of risk
than residential mortgage loans and frequently carry larger loan balances. The
Bank offers fixed-rate commercial business loans and adjustable-rate loans which
adjust daily based upon New York prime. This increased credit risk is a result
of several factors, including the concentration of principal in a limited number
of loans and borrowers, the effects of general economic conditions on business
cash flow, and the difficulty of evaluating and monitoring these types of loans.
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<PAGE>
Construction Loans. The Bank primarily makes construction loans to
individuals to construct single-family, owner-occupied homes for which the Bank
also provides permanent financing and to builders who have a proven track record
on either a pre-sold or speculative basis. Construction financing is generally
considered to involve a higher degree of risk of loss than long-term financing
on improved, occupied real estate. Risk of loss on a construction loan is
dependent largely upon the accuracy of the initial estimate of the property's
value at completion of construction or development and the estimated cost
(including interest) of construction. During the construction phase, a number of
factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, the Bank may be required to advance
funds beyond the amount originally committed to permit completion of the
development. If the estimate of value proves to be inaccurate, the Bank may be
confronted, at or prior to the maturity of the loan, with a project having a
value which is insufficient to assure full repayment.
Loan Commitments. The Bank issues written commitments to prospective
borrowers on all real estate approved loans. Generally, the commitment requires
acceptance within ten days of the date of issuance and must be closed within
thirty days of issuance. At June 30, 1998, the Bank had $4.3 million of
commitments to fund new loans at market interest rates and to fund the
undisbursed portion of construction loans and home equity lines of credit.
Loans to One Borrower. Savings institutions are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans-to-one borrower in an amount equal to 15% of unimpaired capital and
retained income on an unsecured basis and an additional amount equal to 10% of
unimpaired capital and retained income if the loan is secured by readily
marketable collateral (generally, financial instruments, not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $1.8 million as of June 30, 1998.
At June 30, 1998, the Bank's largest lending relationship consisted of
three performing loans, including two amortizing loans, and a fixed rate loan,
totaling $3,350,000 of which $1,950,000 has been sold to other banks as
non-recourse participations, secured by three motel properties, two in Gallup
and one in Grants, New Mexico. The next four largest lending relationships, all
of which consist of performing loans, at June 30, 1998 consisted of a $1,450,000
commercial property loan of which $480,000 has been sold to other banks as
non-recourse participations, two loans totaling $1,370,000 secured by motel
property in Gallup, of which $630,000 has been sold to another bank as
non-recourse participation, sixteen loans totaling $1,070,000 secured by 1-4
dwelling units, a commercial revolving line of credit totaling $61,000, a loan
secured by deposit totaling $300,000, a construction loan totaling $1,100,000
and a loan totaling $260,000 secured by non-residential property.
Non-Performing and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are
generally placed on a non-accrual status when the loan becomes more than 90 days
delinquent and, in the opinion of management, the collection of additional
interest is doubtful. Interest accrued and unpaid at the time a loan is placed
on non-accrual status is charged against interest income. Subsequent interest
payments, if any, are either applied to the outstanding principal balance or
recorded as interest income, depending on the assessment of the ultimate
collectibility of the loan. At June 30, 1998, the Bank had total delinquent
loans of $2,240,000, of which $1,420,000 were delinquent over 30 days, $110,000
were delinquent over 60 days, and $710,000 were delinquent 90 days or more.
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The following table sets forth information regarding non-accrual loans,
real estate owned, and certain other repossessed assets and loans.
At June 30,
-----------------
1998 1997
---- ----
(In Thousands)
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units ... $705 $134
All other mortgage loans ........................ -- 3
Non-mortgage loans:
Commercial real estate .......................... -- --
Consumer ........................................ 2
----
Total ....................................... $707 $--
==== ====
Accruing loans which are contractually past
due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 dwelling units ... $-- $--
All other mortgage loans ........................ -- --
---- ----
Total ....................................... $-- $--
==== ====
Total non-accrual and accrual loans ............... $707 $137
Real estate owned ................................. 159 --
---- ----
Total non-performing assets ....................... $866 $137
==== ====
Total non-accrual and accrual loans to net loans .. 1.14% .26%
Total non-accrual and accrual loans to total assets 0.70% .15%
Total non-performing assets to total assets ....... 0.70% .15%
Interest income that would have been recorded on loans accounted for on
a non-accrual basis under the original terms of such loans was immaterial for
the year ended June 30, 1998. Amounts included in the Bank's interest income for
the year ended June 30, 1998 was, likewise, immaterial.
Classified Assets. OTS regulations provide for a classification system
for problem assets of insured institutions which covers all problem assets.
Under this classification system, problem assets of insured institutions are
classified as "substandard," "doubtful," or "loss." An asset is considered
substandard if it is inadequately protected by the current net worth and paying
capacity of the obligor or of the collateral pledged, if any. Substandard assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as doubtful have all of the weaknesses inherent in those
classified substandard, with the added characteristic that the weaknesses
present make "collection or liquidation in full," on the basis of currently
existing facts, conditions and values, "highly questionable and improbable."
Assets classified as loss are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as loss, it is required either to
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establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge off such amount. An institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS, which may order the establishment of
additional general or specific loss allowances. A portion of general loss
allowances established to cover possible losses related to assets classified as
substandard or doubtful may be included in determining an institution's
regulatory capital, while specific valuation allowances for loan losses
generally do not qualify as regulatory capital. Although the Bank had a low
level of non-performing loans at June 30, 1998, the Bank has only been
originating commercial business loans and consumer loans since the beginning of
1994 and does not have a history on the performance of such loans.
At June 30, 1998, there were no loans with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have concerns as to
the ability of the borrowers to comply with present loan repayment terms.
The following table provides further information about the Bank's
problem assets as of June 30, 1998.
At
June 30,
1998
----
Substandard........................................... $633,591
Doubtful ............................................. --
Loss ................................................. 1,012
General loss allowance................................ 386,970
Specific loss allowance - loans....................... --
Specific loss allowance - real estate owned........... --
Real Estate Owned. Real estate acquired by the Bank as a result of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold. When property is acquired it is recorded at the lower of the
cost or fair value. The Bank records loans as in substance foreclosures if the
borrower has little or no equity in the property based upon its documented
current fair value, the Bank can only expect repayment of the loan to come from
the sale of the property and if the borrower has effectively abandoned control
of the collateral or has continued to retain control of the collateral but
because of the current financial status of the borrower it is doubtful the
borrower will be able to repay the loan in the foreseeable future. In substance
foreclosures are accounted for as real estate acquired through foreclosure,
however, title to the collateral has not been acquired by the Bank. There may be
significant other expenses incurred such as attorney and other extraordinary
servicing costs involved with in substance foreclosures. The Bank's real estate
owned at June 30, 1998 was $159,000.
Allowance for Loan and Real Estate Losses. It is management's policy to
provide for losses on unidentified loans in its loan portfolio and foreclosed
real estate. A provision for loan losses is charged to operations based on
management's evaluation of the potential losses that may be incurred in the
Bank's loan portfolio. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers the Bank's past loan loss experience, known and inherent
risks in the portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying collateral and current
economic conditions. The allowance for loan losses, as a ratio of total loans,
net, was 0.51% at June 30, 1998.
-10-
<PAGE>
Management will continue to review the entire loan portfolio to
determine the extent, if any, to which further additional loss provisions may be
deemed necessary. There can be no assurance that the allowance for losses will
be adequate to cover losses which may in fact be realized in the future and that
additional provisions for losses will not be required.
As a result of the declines in regional real estate market values and
the significant losses experienced by many financial institutions, there has
been a greater level of scrutiny by regulatory authorities of the loan
portfolios of financial institutions undertaken as part of the examination of
the institution by the FDIC, OTS or other federal or state regulators. Results
of recent examinations indicate that these regulators may be applying more
conservative criteria in evaluating real estate market values, requiring
significantly increased provisions for potential loan losses. While the Bank
believes it has established an adequate allowance for loan losses, there can be
no assurance that regulators, in reviewing the Bank's loan portfolio, will not
request the Bank to significantly increase its allowance for loan losses,
thereby negatively affecting the Bank's financial condition and earnings or that
the Bank may not have to increase its level of loan loss allowance in the
future.
Allocation of Allowance for Loan Losses
The following table sets forth the allocation of the Bank's allowance
for loan losses by loan category and the percent of loans in each category to
total loans receivable, net, at the dates indicated. The portion of the loan
loss allowance allocated to each loan category does not represent the total
available for future losses which may occur within the loan category since the
total loan loss allowance is a valuation reserve applicable to the entire loan
portfolio.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------------
1998 1997
-------------------------------- ---------------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Residential real estate....... $214 55% $139 65%
Commercial real estate........ 109 28 116 27
Consumer and
commercial business......... 64 17 84 8
---- ---- ---- ----
Total....................... $387 100% $339 100%
==== ==== ==== ====
</TABLE>
-11-
<PAGE>
Analysis of the Allowance for Loan Losses
The following table sets forth information with respect to the Bank's
allowance for loan losses at the dates indicated.
At June 30,
----------------------
1998 1997
-------- ---------
(Dollars in Thousands)
Total loans outstanding, net ......... $ 75,837 $ 52,022
======== ========
Average loans outstanding ............ $ 63,930 $ 44,246
======== ========
Allowance balances (at beginning of
period) ............................ $ 339 $ 309
Provision (credit):
Residential ........................ 68 --
Consumer and commercial business ... (5) 21
Charge-offs:
Residential ........................ -- --
Consumer and commercial business ... (19) (26)
Recoveries:
Residential ........................ -- --
Consumer and commercial business ... 4 35
Net (charge-offs) recoveries ......... (15) 9
Allowance balance (at end of period) . $ 387 $ 339
======== ========
Allowance for loan losses as a percent
of total loans outstanding, net .... .51% .65%
-12-
<PAGE>
Analysis of the Allowance for Real Estate Owned
The following table sets forth information with respect to the Bank's
allowance for losses on real estate owned at the dates indicated.
At June 30,
-----------------------
1998 1997
-------- -------
(Dollars in Thousands)
Total real estate owned and other
repossessed assets, net ............. $ 159 $ --
Allowance balances - beginning ........ -- --
Provision ............................. -- --
Net charges-offs ...................... $ -- $ --
======= =====
Allowance balances - ending ........... --% --%
======= =====
Allowance for losses on real estate
owned and other repossessed assets to
net real estate owned and other
repossessed assets .................... --% --%
Mortgage-Backed Securities
The following table sets forth the composition of the Bank's
mortgage-backed securities portfolio in dollar amounts and in percentages of the
portfolio at the dates indicated.
<TABLE>
<CAPTION>
At June 30,
--------------------------------------------------------------
1998 1997
------------------------------ -----------------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Mortgage-backed securities:
FNMA.............................. $25,581 76.25% $21,069 65.70%
GNMA.............................. 4,695 13.99 7,274 22.68
FHLMC............................. 2,201 6.56 2,765 8.62
------- ---- ------- ------
Total......................... 32,477 96.80 31,108 97.00
Net premiums...................... 1,074 3.20 962 3.00
Net mortgage-backed securities...... $33,551 100.00% $32,070 100.00%
====== ====== ====== ======
</TABLE>
-13-
<PAGE>
The following table sets forth the Bank's mortgage-backed securities
activities information for the periods indicated.
For the Year Ended June 30,
---------------------------
1998 1997
---- ----
(In Thousands)
Mortgage-backed securities(1):
Beginning balance: .............. $ 32,070 $ 25,246
Mortgage-backed securities
purchased ................... 11,773 12,591
Fair value adjustments ........ (205) 312
-------- --------
Less:
Mortgage-backed securities sold -- --
Principal repayments .......... (10,087) (6,079)
-------- --------
Ending balance .................... $ 33,551 $ 32,070
======== ========
- ------------------
(1) Includes premiums and discounts.
To supplement lending activities, the Bank invests in residential
mortgage-backed securities. Mortgage-backed securities serve as collateral for
borrowings and, through repayments, as a source of liquidity. The
mortgage-backed securities portfolio at June 30, 1998 consisted of
adjustable-rate certificates issued by the FHLMC, GNMA and FNMA. At June 30,
1998, the mortgage-backed securities portfolio classified as available for sale
had a fair value of $33.6 million and an amortized cost of $33.4 million and had
contractual maturities between 10 and 30 years.
Mortgage-backed securities represent a participation interest in a pool
of single-family or multi-family mortgages, the principal and interest payments
on which are passed from the mortgage originators, through intermediaries
(generally quasi-governmental agencies) that pool and repackage the
participation interests in the form of securities, to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.
Mortgage-backed securities typically are issued with stated principal
amounts, and the securities are backed by pools of mortgages that have loans
with interest rates that are within a range and have varying maturities. The
underlying pool of mortgages can be composed of either fixed-rate mortgages or
adjustable-rate mortgage loans. Mortgage-backed securities are generally
referred to as mortgage participation certificates or pass-through certificates.
As a result, the interest rate risk characteristics of the underlying pool of
mortgages (i.e., fixed rate or adjustable rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed pass-through
security is equal to the life of the underlying mortgages.
-14-
<PAGE>
Investment Activities
At June 30, 1998, the Bank had an investment portfolio of approximately
$4.3 million, consisting primarily of mutual funds and tax-exempt securities. To
a lesser extent, the portfolio also includes FHLMC stock, and FHLB and FNMA
debentures. The Bank classifies its investment securities, as available for
sale, and held to maturity. The fair value of investment securities and hold-to
maturity securities at June 30, 1998 was $5.3 million, resulting in a net
unrealized gain at that date of approximately $1 million.
Investment Portfolio
The following table sets forth the fair value of the Bank's investment
securities portfolio.
At June 30,
---------------------------
1998 1997
---- ----
Debt securities: (In Thousands)
Mutual funds...................... $2,283 $ 2,163
U.S. Treasury bills............... -- 1,002
FHLB and FNMA debentures.......... 1,010 397
FHLMC Stock....................... 1,035 780
Tax-Exempt Securities............. 1,005 --
------ -------
Total investment securities..... $ 5,333 $ 4,342
====== ======
-15-
<PAGE>
Investment Portfolio Maturities
The following table sets forth certain information regarding the
carrying values, weighted average yields and maturities of the Bank's investment
securities portfolio at June 30, 1998.
<TABLE>
<CAPTION>
At June 30, 1998
-----------------------------------------------------------------------------------------------------------
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
------------------ ------------------ ------------------- ------------------- ------------------------
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield Value Yield
------- ------ ------- ------- ------- ------- ------- ------- ------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax-exempt Securities $ -- --% $ 603 5.33% $ 402 4.63% $ -- --% $ 1,005 5.05%
Mutual funds......... 2,283 5.81 -- -- -- -- -- -- 2,283 5.81
FNMA debentures...... 1,010 5.41 -- -- -- -- -- -- 1,010 5.41
FHLMC stock.......... -- -- -- -- -- -- 1,035 1.00 1,034 1.00
------- ------- -------- -------- --------
Total.............. $ 3,293 5.69% $ 603 5.33% $ 402 4.63% $ 1,035 1.00% $ 5,333 4.66%
======= ==== ====== ==== ======= ==== ======= ===== ======= ====
</TABLE>
-16-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending
and other investment purposes. The Bank derives funds from amortization and
prepayment of loans and, to a much lesser extent, maturities of investment
securities, borrowings, mortgage-backed securities and operations. Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are significantly influenced by
general interest rates and market conditions. The Bank can obtain advances from
the FHLB as an alternative to retail deposit funds. FHLB advances may also be
used to acquire certain other assets as may be deemed appropriate for investment
purposes. These advances are collateralized by the capital stock of the FHLB
held by the Bank and by certain of the Bank's mortgage loans. The Bank had $38.2
million in FHLB advances at June 30, 1998.
Deposits. The Bank currently offers regular passbook savings, money
market deposit accounts (which are actually statement savings accounts with
limited third party transfer or check writing provisions), and term certificate
accounts, primarily to consumers within its primary market area. A full range of
demand and NOW accounts are now offered, both for consumers and commercial
customers. Deposit account terms vary according to the minimum balance required,
the time period the funds must remain on deposit and the interest rate, among
other factors. As of June 30, 1998, the Bank had no brokered deposits.
Jumbo Certificate Accounts
The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity as of June 30,
1998.
Certificates
of Deposits
-----------
Maturity Period (In Thousands)
- ---------------
Within three months............................. $ 8,528
Three through six months........................ 6,768
Six through twelve months....................... 14,675
Over twelve months.............................. 18,526
------
$48,497
=======
Personnel
As of June 30, 1998, the Bank employed 28 employees with 27 working
full-time. None of the Bank's employees are represented by a collective
bargaining group. The Bank believes that its relationship with its employees is
good.
-17-
<PAGE>
REGULATION
Set forth below is a brief description of certain laws which relate to
the regulation of the Bank and the Company. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, the Company is required to
register and file reports with the OTS and is subject to regulation and
examination by the OTS. In addition, the OTS has enforcement authority over the
Company and its non-savings association subsidiaries, should such subsidiaries
be formed, which also permits the OTS to restrict or prohibit activities that
are determined to be a serious risk to the subsidiary savings association. This
regulation and oversight is intended primarily for the protection of the
depositors of the Bank and not for the benefit of stockholders of the Company.
Qualified Thrift Lender Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test. If the Company
acquires control of another savings association as a separate subsidiary, it
would become a multiple savings and loan holding company, and the activities of
the Company and any of its subsidiaries (other than the Bank or any other
SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL and were acquired in a supervisory acquisition. See "-
Regulation of the Bank Qualified Thrift Lender Test."
Regulation of the Bank
General. As a federally chartered, SAIF-insured savings association,
the Bank is subject to extensive regulation by the OTS and the Federal Deposit
Insurance Corporation ("FDIC"). Lending activities and other investments must
comply with various federal statutory and regulatory requirements. The Bank is
also subject to certain reserve requirements promulgated by the Federal Reserve
Board.
Insurance of Deposit Accounts. The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured member (as defined by law
and regulation). Insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is in
an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC or the
institution's primary regulator.
The FDIC charges an annual assessment for the insurance of deposits
based on the risk a particular institution poses to its deposit insurance fund,
depending upon the institution's risk classification. This risk classification
is based on an institution's capital group and supervisory subgroup assignment.
In addition, the FDIC is authorized to increase deposit insurance rates on a
semi-annual basis if it determines that such action is necessary to cause the
balance in the SAIF to reach the designated reserve ratio of 1.25% of
SAIF-insured deposits within a reasonable period of time. The FDIC may impose
special assessments of SAIF members to repay amounts borrowed from the U.S.
Treasury or for any other reason deemed necessary by the FDIC. Prior to
September 30, 1996, savings associations paid within a range of .23% to .31% of
domestic deposits and the SAIF was substantially underfunded. By comparison,
prior to September 30, 1996, members of the Bank Insurance Fund ("BIF"),
predominantly
-18-
<PAGE>
commercial banks, were required to pay substantially lower, or virtually no,
federal deposit insurance premiums.
Effective September 30, 1996, federal law was revised to mandate a
one-time special assessment on SAIF members such as the Bank of approximately
.657% of deposits held on March 31, 1995. The Bank recorded a $250,000 pre-tax
expense for this assessment for the year ended June 30, 1997, recognized in the
first fiscal quarter. Beginning January 1, 1997, deposit insurance assessments
for SAIF members were reduced to approximately .064% of deposits on an annual
basis; this rate may continue through the end of 1999. During this same period,
BIF members are expected to be assessed approximately .013% of deposits.
Thereafter, assessments for BIF and SAIF members should be the same and the SAIF
and BIF may be merged. It is expected that these continuing assessments for both
SAIF and BIF members will be used to repay outstanding Financing Corporation
bond obligations. As a result of these changes, beginning January 1, 1997, the
rate of deposit insurance assessed the Bank declined by approximately 70% from
rates in effect prior to September 30, 1996.
Regulatory Capital Requirements. OTS capital regulations require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based capital requirement
equal to 8.0% of total risk-weighted assets. The Bank's regulatory capital
exceeded all minimum regulatory capital requirements applicable to it as of June
30, 1998.
Interest-Rate Risk (IRR). As a financial institution regulated by the
OTS, the Bank is required to measure and monitor its sensitivity to interest
rate movements. OTS-regulated institutions meeting certain conditions have the
option of utilizing the OTS-established IRR measurement model, or developing an
in-house model. The Bank has chosen to meet its IRR sensitivity modeling
requirements through use of the OTS's Net Present Value (NPV) model. This model
measures how the net present value of an institution's assets, liabilities and
off-balance-sheet items would change in the event of a range of assumed changes
in market interest rates. These computations estimate the effect on NPV of a
permanent and instantaneous change in market interest rates of plus or minus
100, 200, 300, and 400 basis points (bps). The Board has established acceptable
ranges for the NPV changes across these various scenarios.
The following table sets forth the interest-rate risk measures, as
calculated by the OTS's NPV model, for the Bank at June 30, 1998, given an
instantaneous and permanent increase in market interest rates.
At June 30,
Risk Measures: 1998
-----------
200 Basis point rate shock
Pre-shock NPV ratio: NPV as % of present value 12.16%
of assets
Exposure measure: Post-shock NPV ratio: 11.11%
Sensitivity measure: Change in NPV ratio: 106 bps
Calculations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including relative levels of market
interest rates, loan prepayments and deposit run-off, and should not be relied
upon as indicative of actual results. Further, the calculations do not
contemplate any actions the Bank may undertake in response to changes in
interest rates.
-19-
<PAGE>
Savings associations with a greater than "normal" level of interest
rate exposure may, in the future, be subject to a deduction from capital for an
interest rate risk ("IRR") component for purposes of calculating their
risk-based capital requirement.
Dividend and Other Capital Distribution Limitations. OTS regulations
require the Bank to give the OTS 30 days advance notice of any proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger and other distributions charged against capital. The rule
establishes three tiers of institutions, based primarily on an institution's
capital level. An institution that exceeds all fully phased-in capital
requirements before and after a proposed capital distribution ("Tier 1
institution") and has not been advised by the OTS that it is in need of more
than the normal supervision can, after prior notice but without the approval of
the OTS, make capital distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the calendar year plus the amount
that would reduce by one-half its "surplus capital ratio" (the excess capital
over its fully phased-in capital requirements) at the beginning of the calendar
year, or (ii) 75% of its net income over the most recent four quarter period.
Any additional capital distributions require prior regulatory approval. At June
30, 1998, the Bank was a Tier 1 institution. In the event the Bank's capital
fell below its fully phased-in requirement or the OTS notified it that it was in
need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
In addition, the Bank may not declare or pay a cash dividend on its
capital stock if the effect thereof would be to reduce the regulatory capital of
the Bank below the amount required for the liquidation account to be established
pursuant to the Bank's plan of conversion.
Loans to One Borrower. Savings institutions are subject to the same
limits as those applicable to national banks, which under current regulations
limit loans to one borrower in an amount equal to 15% of unimpaired capital and
unimpaired surplus, or $500,000, whichever is greater. The Bank's maximum loan
to one borrower limit was approximately $1.8 million as of June 30, 1998.
Qualified Thrift Lender Test. Savings institutions must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily residential mortgages and related investments, including certain
mortgage-related securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing privileges from the FHLB of Dallas. The
required percentage of QTIs is 65% of portfolio assets (defined as all assets
minus intangible assets, property used by the institution in conducting its
business and liquid assets equal to 20% of total assets). Certain assets are
subject to a percentage limitation of 20% of portfolio assets. In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. As of June 30, 1998, the Bank was in compliance with its QTL
requirement.
Liquidity Requirements. All savings associations are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings payable in one year or less. The liquidity requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings associations.
-20-
<PAGE>
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Dallas, which is one of 12 regional FHLBs that administers the home financing
credit function of savings associations. Each FHLB serves as a reserve or
central bank for its members within its assigned region. It is funded primarily
from proceeds derived from the sale of consolidated obligations of the FHLB
System. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW, and Super
NOW checking accounts) and non-personal time deposits. The balances maintained
to meet the reserve requirements imposed by the Federal Reserve Board may be
used to satisfy the liquidity requirements that are imposed by the OTS. At June
30, 1998, the Bank was in compliance with these requirements.
Item 2. Description of Property.
- --------------------------------
The Bank owns its main office located at 221 West Aztec Avenue, Gallup,
New Mexico. The Bank leases additional office space across the street from its
main office.
Item 3. Legal Proceedings
- --------------------------
Neither the Company nor the Bank are engaged in any legal proceedings
of a material nature at the present time. From time to time the Bank is a party
to legal proceedings in the ordinary course of business wherein it enforces its
security interest in mortgage loans made by it.
Item 4. Submission of Matters to a Vote of Security - Holders
- --------------------------------------------------------------
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
The information contained under the section captioned "Stock Market
Information" in the Company's Annual Report to Stockholders for the fiscal year
ended June 30, 1998 (the "Annual Report") is incorporated herein by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
The information contained in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.
Item 7. Financial Statements
- -----------------------------
The Company's consolidated financial statements listed under Item 13
herein are incorporated herein by reference. The audit report for the 1997
fiscal year is included in this report.
-21-
<PAGE>
[Atkinson & Co., Ltd. Letterhead]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico
We have audited the consolidated statements of earnings, changes in
stockholders' equity, and cash flows GFSB Bancorp, Inc. and Subsidiary for the
year ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of GFSB Bancorp, Inc. and
Subsidiary consolidated operations and its consolidated cash flows for the year
ended June 30, 1997 in conformity with generally accepted accounting principles.
/s/Atkinson & Co., Ltd.
Albuquerque, New Mexico
August 11, 1997
-22-
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
- --------------------------------------------------------------------------------
Financial Disclosure
- --------------------
The information contained in the section captioned "Proposal II --
Ratification of Appointment of Auditors" in the Company's definitive proxy
statement for the Company's 1998 Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
PART III
Item 9. Directors and Executive Officers, Promoters and Control Persons;
- --------------------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
The information contained under the section captioned "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Proxy Statement is
incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The information contained under the section captioned "Voting
Securities and Principal Holders Thereof" and "Proposal I - Election of
Directors" in the Proxy Statement is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information contained under the section captioned "Certain
Relationships and Related Transactions" in the Proxy Statement is incorporated
herein by reference.
Item 13. Exhibits, List and Reports on Form 8-K
- ------------------------------------------------
(a) The Consolidated Financial Statements and Independent Auditors' Report
included in the Annual Report, listed below, are incorporated herein by
reference.
1. Independent Auditors' Report
2. GFSB Bancorp, Inc.
(a) Consolidated Statement of Financial Condition at June
30, 1998.
(b) Consolidated Statements of Earnings for each of the
years in the two-year period ended June 30, 1998
(c) Consolidated Statements of Stockholders' Equity for
each of the years in the two-year period ended June
30, 1998
-23-
<PAGE>
(d) Consolidated Statements of Cash Flows for each of the
years in the two-year period ended June 30, 1998
(e) Notes to Consolidated Financial Statements
The following exhibits are included in this Report or
incorporated herein by reference:
<TABLE>
<CAPTION>
<S> <C> <C>
3. (a) List of Exhibits
3.1 Certificate of Incorporation of GFSB Bancorp, Inc.*
3.2 Bylaws of GFSB Bancorp, Inc.*
10.1 1995 Stock Option Plan**
10.2 Management Stock Bonus Plan**
13 1998 Annual Report to Stockholders
21 Subsidiaries of the Issuer**
23.1 Consent of Neff & Company LLP.
23.2 Consent of Atkinson & Co., Ltd.
27 Financial Data Schedule (in electronic filing only)
</TABLE>
(b) No reports on Form 8-K were filed during the last quarter of the period
covered by this Report.
* Incorporated herein by reference to exhibits 3(i)(Certificate of
Incorporation) and 3(ii)(Bylaws) to the Registration Statement on Form
S-1 of the Registrant (File No. 33-90400) initially filed with the
Commission on March 17, 1995.
** Incorporated by reference to the identically numbered exhibits of the
Annual Report on Form 10- KSB for the fiscal year ended June 30, 1997
(File No. 0-25854) filed with the SEC.
-24-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GFSB BANCORP, INC.
Date: September 28, 1998 By: /s/Jerry R. Spurlin
--------------------------------
Jerry R. Spurlin
President
(Duly Authorized Representative)
Pursuant to the requirement of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/Dr. Wallace R. Phillips By:/s/Jerry R. Spurlin
------------------------------------ -----------------------------------
Dr. Wallace R. Phillips Jerry R. Spurlin
Director President
(Principal Executive, Financial and
Accounting Officer)
Date: September 28, 1998 Date: September 28, 1998
By: /s/Richard C. Kauzlaric By:
------------------------------------ -----------------------------------
Richard C. Kauzlaric James Nechero, Jr.
Chairman of the Board Director and Assistant Secretary
Date: September 28, 1998 Date: September 28, 1998
By: By: /s/Michael P. Mataya
------------------------------------ ----------------------------------
Vernon I. Hamilton Michael P. Mataya
Director Director
Date: September 28, 1998 Date: September 28, 1998
By: /s/Charles L. Parker, Jr. By:
------------------------------------ -----------------------------------
Charles L. Parker, Jr. George S. Perce
Director and Treasurer Director and Secretary
Date: September 28, 1998 Date: September 28, 1998
EXHIBIT 13
<PAGE>
C O N T E N T S
PAGE
LETTER TO STOCKHOLDERS..................................................1
CORPORATE PROFILE AND STOCK MARKET INFORMATION........................2-3
SELECTED FINANCIAL AND OTHER DATA.....................................4-5
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS................................6-17
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.....................20
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION........................19
CONSOLIDATED STATEMENTS OF EARNINGS...............................20-21
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'
EQUITY.............................................................22
CONSOLIDATED STATEMENTS OF CASH FLOWS.............................23-24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS........................25-52
OFFICE LOCATION AND OTHER CORPORATE INFORMATION........................53
<PAGE>
To Our Stockholders:
We are pleased to present to you our fourth annual stockholders' report. This
report covers the third full year of operations since the successful completion
on June 29, 1995 of the conversion of Gallup Federal Savings Bank (the "Bank")
from a federally chartered mutual savings association to a federally chartered
stock savings bank and the acquisition of all of the issued and outstanding
capital stock of the Bank by GFSB Bancorp, Inc. (the "Company").
Net earnings for the Company for the year ended June 30, 1998 were $877,209, an
increase of $241,730 or 38% over net earnings for the previous year. On a per
share basis the Company earned $0.785 per share compared with $0.514 per share
last year, adjusted for the stock dividend declared this year.
The Company's total assets increased to $123,161,000 at June 30, 1998,
representing growth of $29,368,000 or 31% from total assets of $93,793,000 at
June 30, 1997. Deposits also increased $11,507,000 or 20% from $57,872,000 at
June 30, 1997 to $69,379,000 at June 30, 1998.
We do appreciate the confidence you share in our Company. We are going through a
tremendous growth period. Our Directors and employees are doing everything we
can to build customer loyalty, customer base and continue to make a substantial
positive impact on our community. Thank you very much for your support, and we
certainly appreciate your banking with us.
Sincerely,
Jerry R. Spurlin W.R. Phillips, D.D.S. Richard C. Kauzlaric
President of the Company Chairman of the Board Chairman of the
and the Bank of the Company Board of the Bank
September 15, 1998
<PAGE>
GFSB Bancorp, Inc.
Corporate Profile
GFSB Bancorp, Inc. (the "Company") is a Delaware corporation organized in March
1995 at the direction of the Board of Directors of Gallup Federal Savings Bank
(the "Bank") to acquire all of the capital stock that the Bank issued upon its
conversion from the mutual to stock form of ownership. The Company is a unitary
savings and loan holding company which, under existing laws, generally is not
restricted in the types of business activities in which it may engage, provided
that the Bank retains a specified amount of its assets in housing-related
investments. At the present time, because the Company does not conduct any
active business, the Company does not employ any persons other than officers of
the Bank, but utilizes the support staff of the Bank from time to time.
The Bank is a federally chartered stock savings bank headquartered in Gallup,
New Mexico. The Bank was founded in 1934. Its deposits are federally insured by
the Savings Association Insurance Fund ("SAIF"), administered by the Federal
Deposit Insurance Corporation, and the Bank is a member of the Federal Home Loan
Bank ("FHLB") System. The Bank is a community oriented, full service retail
savings institution offering primarily traditional mortgage loan products. It is
the Bank's intent to remain an independent community savings bank serving the
local banking needs of its community.
The Bank attracts deposits from the general public and uses such deposits
primarily to invest in residential lending on owner occupied properties. The
Bank also makes consumer, commercial real estate, commercial, construction, and
multi-family loans.
Stock Market Information
Since its issuance on June 29, 1995, the Company's $0.10 par value common stock
has been traded in the over-the-counter market. The following table reflects the
stock prices as published by the Nasdaq Small-Cap Market for the most recent two
fiscal years. The quotations reflect inter-dealer prices, without retail
mark-up, mark-down, or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
Bid Prices
<S> <C> <C>
Quarter Ended High Low
September 30, 1996 14.250 13.250
December 31, 1996 16.000 13.750
March 31, 1997 17.500 15.500
June 30, 1997 19.000 16.750
September 30, 1997 21.000 22.000
December 31, 1997 20.250 21.125
March 31, 1998 22.500 23.500
June 30, 1998* 15.250 16.750
</TABLE>
* Reflects 50% stock split effective March 31, 1998
<PAGE>
GFSB Bancorp, Inc.
Corporate Profile (continued)
The number of stockholders of record of common stock as of the record date
September 15, 1998 ("Record Date"), was approximately 215. This does not reflect
the number of persons or entities who held stock in nominee or "street" name
through various brokerage firms. As of the Record Date, there were 1,107,261
shares outstanding.
The Company's ability to pay dividends to stockholders is subject to the
requirements of Delaware law. No dividend may be paid by the Company unless its
board of directors determines that the Company will be able to pay its debts in
the ordinary course of business after payment of the dividend. In addition, the
Company's ability to pay dividends is dependent, in part, upon the dividends it
receives from the Bank. The Bank may not declare or pay a cash dividend on any
of its stock if the effect thereof would be to cause the Bank's regulatory
capital to be reduced below (1) the amount required for the liquidation account
established in connection with the Bank's conversion from mutual to stock form,
or (2) the regulatory capital requirements imposed by the Office of Thrift
Supervision ("OTS"). Total dividends declared by the Company during the year
ended June 30, 1998 were $309,102.
The balance of this page intentionally left blank
<PAGE>
<TABLE>
<CAPTION>
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA
Financial Condition (Dollars in Thousands)
At June 30, 1998 1997 1996
<S> <C> <C> <C>
Assets $123,209 $ 93,793 $ 73,250
Loans receivable, net 75,837 52,022 38,728
Mortgage-backed securities 33,551 32,070 25,246
Stock of FHLB 1,965 1,060 551
Investment securities 5,188 4,342 4,573
Cash and cash equivalents 4,538 2,994 3,167
Deposits 69,379 57,872 45,990
Advances from the FHLB 38,248 20,930 10,854
Retained earnings (substantially restricted) 8,042 7,514 7,199
Unrealized gain on available for sale
Securities, net 692 557 128
</TABLE>
<TABLE>
<CAPTION>
Summary of Operations
(Dollars in Thousands)
Year ended June 30,
<S> <C> <C> <C>
Interest income $ 8,259 $ 6,079 $ 4,876
Interest expense 5,009 3,389 2,403
Net interest income 3,340 2,690 2,473
Provision for loan losses 63 21 28
Net interest income after provision for
Loan losses 3,187 2,669 2,445
Non-interest income:
Income from real estate operations - - 3
Other 104 49 40
Total non-interest income 104 49 43
Non-interest expense:
Compensation and benefits 973 835 614
Professional fees 104 92 123
Occupancy 166 146 108
Advertising 50 46 34
Data processing 137 98 93
Insurance and SAIF premiums 55 330 105
Other and stock subscription services 389 252 191
Total non-interest expense 1,874 1,799 1,268
Earnings before income taxes 1,416 919 1,220
Income tax expense 539 283 432
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Net earnings $ 877 $ 636 $ 788
</TABLE>
<TABLE>
<CAPTION>
GFSB BANCORP, INC.
SELECTED FINANCIAL AND OTHER DATA - CONTINUED
Selected Operating Ratios
Year ended June 30, 1998 1997 1996
<S> <C> <C> <C>
Performance ratios:
Return on average assets (net income
divided by average total assets) 0.81% 0.76% 1.23%
Return on average equity (net income
divided by average equity) 6.09 4.34 4.88
Average interest earning assets to average
interest-bearing liabilities 1.16X 1.19X 1.32X
Net interest income after provision for
loan losses, to total other expenses 170.06% 148.36% 192.85%
Net interest rate spread 2.46% 2.52% 2.75%
Net yield on average interest-earnings
Assets 3.25% 3.34% 3.97%
Equity ratios:
Average equity to average assets ratio
(average equity divided by average total
assets) 13.95 17.54 25.11
Equity to assets at period end 11.54 14.87 20.97
Assets quality ratios:
Non-performing assets to total assets .57 .15 .21
Non-performing loans to total assets .57 .15 .21
Non-performing loans to net loans .93 .26 .39
Allowance for loan losses, REO and other
repossessed assets to non-performing
assets 54.74 247.63 204.14
Allowance for loan losses to total loans,
Net .51 .65 .80
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
GFSB Bancorp, Inc. is the 100% owner of Gallup Federal Savings Bank ("the
Bank"), and the Bank is currently the only entity with which the holding company
has an ownership interest. The Bank is primarily engaged in the business of
accepting deposit accounts from the general public and using such funds to
originate mortgage loans for the purchase and refinancing of one-to-four family
homes located in its primary market area. The Bank also originates multi-family,
commercial real estate, construction, consumer and commercial business loans,
and purchases participations in one-to-four family mortgage loans. The Bank also
purchases mortgage-backed and investment securities. The largest components of
the Bank's net earnings are net interest income, which is the difference between
interest income and interest expense, and non-interest income derived primarily
from fees. Consequently, the Bank's earnings are dependent on its ability to
originate loans, and the relative amounts of interest-earning assets and
interest-bearing liabilities. The Bank's net earnings is also affected by its
provision for loan losses as well as the amount of other expense, such as
compensation and benefit expense, occupancy and equipment expense and deposit
insurance premium expenses. Earnings of the Bank also are affected significantly
by general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities. The
disparity in premiums paid by Bank Insurance Fund ("BIF") and SAIF insured
institutions have also adversely impacted the Bank.
In September 1996, Congress enacted a plan to mitigate the effect of the
BIF/SAIF insurance premium disparity. This plan required all SAIF member
institutions, including the Bank, to pay a one-time assessment to re-capitalize
the SAIF. The effect of this reduced the capital of the Bank by the amount of
the fee, and such amount was charged to earnings in the quarter ended September
30, 1996. The assessment amount the Bank paid was $250,000 which is 65.7 basis
points on the amount of deposits held by the Bank at March 31, 1995.
Beginning January 1, 1997, deposit insurance assessments for SAIF members are to
be .064% of deposits on an annual basis. This rate is expected to be effective
through the end of 1999. During this same period, BIF members (predominantly
composed of commercial banks) are to be assessed .013% of most deposits.
Thereafter, assessments for BIF and SAIF members should be the same and BIF and
SAIF may be merged. As a result of these changes, beginning January 1, 1997, the
rate of deposit insurance assessed the Bank declined by approximately 70% from
the rate in effect prior to September 30, 1996.
GFSB Bancorp, Inc. (the "Company") may from time to time make written or oral
"forward-looking statements", including statements contained in the Company's
filings with the Securities and Exchange Commission (including this annual
report on Form 10-KSB and its exhibits), in its reports to stockholders and in
other communications by the Company, which are made in good faith by the Company
pursuant to the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995.
These forward-looking statements involve risks and uncertainties, such as
statements of the
<PAGE>
Company's plans, objectives, expectations, estimates and intentions, that are
subject to change based on various important factors (some of which are beyond
the Company's control.). The following factors, among others, could cause the
Company's financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in forward-looking statements:
the strength of the United States economy in general and the strength of the
local economies in which the Company conducts operations; the effects of, and
changes in, trade, monetary and fiscal policies and laws, including interest
rate policies of the Board of Governors of the Federal Reserve System,
inflation, interest rate and market and monetary fluctuations; the timely
development of and acceptance of new products and services of the Company and
the perceived overall value of these products and services by users, including
the features, pricing and quality compared to competitors' products and
services; the willingness of users to substitute competitors' products and
services for the Company's products and services; the success of the Company in
gaining regulatory approval of its products and services , when required; the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking, securities and insurance); technological changes;
acquisitions; changes in consumer spending and savings habits; and the success
of the Company at managing the risks described above.
The Company cautions that these important factors are not exclusive. The Company
does not undertake to update any forward-looking statement, whether written or
oral, that may be made from time to time by or on behalf of the Company.
Management Strategy
Management's strategy has been to monitor interest rate risk, by asset and
liability management, and maintain asset quality while enhancing earnings and
profitability. The Bank's strategy has been primarily to make loans,
secondarily, to invest in mortgage-backed securities and investment securities,
and thirdly, to purchase participations in adjustable rate, one-to-four family
mortgage loans primarily secured by one-to-four family residences. The Bank's
purchase of mortgage-backed securities and investment securities is designed
primarily for safety of principal and secondarily for rate of return. The Bank's
lending strategy has historically focused on the origination of traditional
one-to-four-family mortgage loans primarily secured by one-to-four-family
residences in the Bank's primary market area.
These loans typically have fixed rates. The Bank also invests a portion of its
assets in construction, consumer, commercial business, multi-family and
commercial real estate loans as a method of enhancing earnings and profitability
while also reducing interest rate risk. Since 1994, the Bank has actively
originated commercial business loans and increased its origination of commercial
real estate loans and construction loans. These loans typically have adjustable
interest rates and are for shorter terms than residential first mortgage loans.
The Bank has limited experience with these types of loans, and this type of
lending generally has more risk than residential lending. The Bank's purchase of
participations in adjustable rate, one-to-four-family mortgage loans is designed
to increase earnings and reduce interest rate risk. These loans have more risk
than loans originated by the Bank, therefore, they have adjustable rates that
are higher than standard. Management is currently considering purchasing
automobile loans from dealers. These loans would have risk and terms comparable
to automobile loans originated in the Bank. Investment securities in the Bank's
portfolio typically have shorter
<PAGE>
terms to maturity than residential first mortgage loans. As part of its
asset/liability management strategy, the Bank sells its fixed rate mortgage
loans with terms over 15 years into the secondary market. The Bank has sought to
remain competitive in its market by offering a variety of products. Automatic
Teller Machine access and commercial and consumer credit life insurance are
additional products now offered by the Bank. The Bank attempts to manage the
interest rates it pays on deposits while maintaining a stable deposit base and
providing quality services to its customers.
During the past few years the competing financial institutions located in Gallup
have all been acquired by statewide and regional bank holding companies. As a
result, as of 1995, the Bank is the only local institution headquartered and
managed in Gallup, New Mexico. The Bank believes that its "hometown" advantage
will provide an opportunity to expand its operations as the only local
independent financial institution and that the reorganization to the holding
company format and the capital raised from the conversion will enable it to take
advantage of this opportunity. The new structure and capital has already enabled
the Bank to expand both the amount and scope of its current lending and
investment activities. The Bank also believes that it has a unique ability to
grow as a result of the relatively large number of local retail and wholesale
businesses specializing in Indian jewelry. In addition, the Bank is exploring
methods of increasing its business with the large Native American population
located in the nearby Navajo and Zuni Pueblo Indian reservations.
Asset and Liability Management
In an effort to reduce interest rate risk and protect it from the negative
effect of rapid increases and decreases in interest rates, the Bank has
instituted certain asset and liability management measures.
(See "Management Strategy" discussed above).
The Bank, like many other thrift institutions, is exposed to interest rate risk
as a result of the difference in the maturity of interest-bearing liabilities
and interest-earning assets and the volatility of interest rates. Most deposit
accounts react more quickly to market interest rate movements than do the
existing mortgage loans because of their shorter terms to maturity; sharp
decreases in interest rates would typically positively affect the Bank's
earnings. Conversely, this same mismatch will generally adversely affect the
Bank's earnings during periods of increasing interest rates. Generally, market
interest rates declined between 1991 and 1993. By the latter part of 1993,
interest rates on U.S. treasury bonds and home mortgage loans had declined to
lower levels than had been experienced in the prior ten years. Following a
substantial increase in 1994 and a slight drop in 1995, general market interest
rates, including rates charged on mortgage loans and rates paid on deposits,
have remained relatively stable through June, 1997. This year saw long-term
interests rates fall to historically low rates.
As during the low interest rate environment that existed from 1991 through 1993,
the Bank, like other financial institutions, experienced a significant increase
in homeowners seeking to refinance their existing mortgages. The trend resulted
in a decrease in the yield on the Bank's interest earning assets, namely the
loan portfolio and mortgage-backed and investment securities portfolios. The net
interest rate spread may decrease if deposits re-price upward more rapidly than
interest earning assets.
<PAGE>
Net Portfolio Value Tables
In order to encourage institutions to reduce their interest rate risk, the OTS
adopted a final rule in August 1993 incorporating an interest rate risk ("IRR")
component into the risk-based capital rules. The IRR component is a dollar
amount that will be deducted from total capital for the purpose of calculating
an institution's risk-based capital requirement and is measured in terms of the
sensitivity of its NPV to changes in interest rates. NPV is the difference
between incoming and outgoing discounted cash flows from assets, liabilities,
and off-balance sheet contracts. An institution's IRR is measured as the change
to its NPV as a result of a hypothetical 200 basis point change in market
interest rates divided by the estimated economic value (i.e., present value) of
its assets. A resulting change in NPV of more than 2% of the estimated market
value of its assets will require the institution to deduct from its capital 50%
of that excess change. The OTS calculates an institution's NPV based on
financial data submitted by the institution pursuant to its required reports and
using a complex computer model that the OTS has devised. The rules provide that
the OTS will calculate the IRR component quarterly for each institution. The
Bank, based on asset size and risk-based capital, is exempt from this rule. The
following table presents the Bank's NPV at June 30, 1998 as calculated by the
OTS, based on information provided to the OTS by the Bank. Actual experience may
differ from the components of this table.
<TABLE>
<CAPTION>
* INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE (NPV)
Change in NPV
Rates $ Amount $ Change % Change Ratio Change
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
+400 bp $ 10,384 -4,923 -32% 8.92% -324 bp
+300 bp 12,036 -3,270 -21% 10.11% -205 bp
+200 bp 13,514 -1,793 -12% 11.11% -106 bp
+100 bp 14,669 -638 -4% 11.83% -33 bp
0 bp 15,037 12.16%
-100 bp 15,421 114 +1% 12.12% -5 bp
-200 bp 15,155 -152 -1% 11.80% -36 bp
-300 bp 14,987 -319 -2% 11.56% -60 bp
-400 bp 14,891 -416 -3% 11.36% -80 bp
</TABLE>
* Denotes rate shock used to compute interest rate risk capital component.
<PAGE>
Average Balance Sheet
The following table sets forth certain information relating to the Bank's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material differences in the information presented.
<TABLE>
<CAPTION>
Year ended June 30, 1998 Year ended June 30, 1997
------------------------------ -------------------------------
Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost
------- -------- ---------- ------- -------- ----------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable (1) $ 60,042 $5,590 9.31% $44,246 $ 3,893 8.79%
Investment securities and
mortgage-backed securities 36,401 2,493 8.08% 33,918 2,054 6.06%
Other interest-earning
assets (2) 3,551 176 4.96% 2,647 132 5.00%
Total interest-earning assets 99,994 8,259 8.26% 80,811 6,079 7.52%
Non-interest earning assets 3,272 2,560
Total assets $103,266 $ 83,371 - -
Interest-bearing liabilities:
Transaction accounts $ 3,609 62 1.72% $ 3,609 $ 34 .94%
Passbook savings 3,563 107 3.00% 2,896 87 3.00%
Money market accounts 7,633 324 4.24% 8,295 335 4.04%
Certificates of deposit 43,017 2,598 6.04% 37,534 2,140 5.70%
Other liabilities 26,811 1,917 7.15% 15,375 793 5.16%
Total interest-bearing
liabilities 86,318 5,009 5.80% 67,709 3,389 5.00%
Non-interest bearing
liabilities 2,540 1,056
Total liabilities $88,858 68,765
Stockholders' equity 14,606 14,606
Total liabilities and
stockholders' equity $103,266 $83,371
Net interest income $3,250 $ 2,690
Interest rate spread (3) 2.46% 2.52%
Net yield on interest-
earning assets (4) 3.25% 3.34%
Ratio of average interest-
earning assets to average
interest-bearing liabilities 1.16X 1.19X
</TABLE>
<PAGE>
(1) Average balances include non-accrual loans.
(2) Includes interest-bearing deposits in other financial institutions.
(3) Interest-rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
(4) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume). The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended June 30, Year Ened June 30,
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Increase (Decrease)
Due to Due to
----------------------------------------- ---------------------------------------
Rate/ Rate/
Volume Rate Volume Net Volume Rate Volume Net
-------- -------- --------- --------- -------- -------- -------- -------
(Dollars in Thousands) (Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans receivable $ 1,388 230 82 1,700 $ 843 $ (91) $ (24) $ 728
Mortgage-backed securities and 580 (71) (30) 479
investment securities 150 685 50 885 3 8 0 11
Other interest-earning assets 45 (1) - 44 26 (3) (1) 22
------ ------ ------ ------ ------ ------ ------ -----
Total interest-earning assets 1,583 914 132 2,629 1,452 (157) (55) 1,240
Interest expense:
Savings accounts 20 - 667 687 53 (12) (7) 34
Money markets (27) 17 (1) (11) 44 11 2 57
Certificates of deposit 313 128 19 460 450 (15) (4) 431
Other liabilities 590 306 228 1,124 473 (4) (5) 464
------- ------ ------- ------- ------ ------ ------- -----
Total interest-bearing liabilities 1,020 (20) (14) 986
------ ------ ------- -----
Net change in interest income $ 687 $ 463 $ (781) $1,505 $ 432 $ (137) $ (41) $ 254
====== ====== ====== ===== ====== ====== ======= =====
</TABLE>
<PAGE>
Financial Condition
General. The Company's total assets increased $29.4 million or 31% from $93.8
million at June 30, 1997 to $123.2 million at June 30, 1998. This increase was
primarily the result of a $4 million increase in cash and investment securities,
and a $23.8 million increase in the Bank's net loan portfolio. The majority of
the increases are primarily attributable to the efforts of management to
effectively utilize the increased capital infusion made as a result of the
conversion from a mutual to stock form of ownership, the increased lending
strategies of management, and some leveraged transactions whereby the Bank
borrowed funds from the Federal Home Loan Bank of Dallas to purchase adjustable
rate mortgage-backed securities. During the same period, deposits increased
$11.5 million from $57.8 million at June 30, 1997 to $69.3 million at June 30,
1998. This increase is primarily due to an increase in the Bank's volume of NOW
accounts, business checking accounts, local (non-brokered) jumbo certificates of
deposit and public (state and city) certificates of deposits. Advances from the
Federal Home Loan Bank (FHLB) increased $17.3 million from $20.9 million at June
30, 1997 to $38.2 million at June 30, 1998. These additional borrowings funded
purchases of loans, securities and mortgage loan participations. The Bank had
$692,000 and $557 000 in unrealized gains (net of deferred taxes) at June 30,
1998 and 1997, respectively, from net market gains on the Bank's
available-for-sale investment and mortgage-backed securities portfolio.
Unrealized gains and losses do not impact the Bank's earnings until they are
realized.
Comparison of Operating Results for Years Ended June 30, 1998 and 1997
General. Net earnings increased $241,000 or 38% for the year ended June 30, 1998
from the year ended June 30, 1997. This increase was primarily the result of an
increase in net interest earnings of approximately $518,000 offset by an
increase in interest expense of $76,000 and income tax expense of $256,000.
Total Interest Earnings. Total interest earnings increased $2.2 million or 36%
from $6.1 million for the year ended June 30, 1997 to $8.3 million for the year
ended June 30, 1998. The increase was primarily due to the $23.8 million
increase in the loan portfolio.
Interest Expense. Total interest expense increased $1.6 million or 47% from $3.4
million for the year ended June 30, 1997 to $5.0 million for the year ended June
30, 1998. This increase was primarily due to an increase of $1,124,000 of
interest incurred on increased Federal Home Loan Bank advances and a general
increase in the deposit base of $11.5 million.
Provision for Losses on Loans. The Bank maintains an allowance for loan losses
based upon management's periodic evaluation of known and inherent risks in the
loan portfolio, past loss experience, adverse situations that may affect the
borrowers' ability to repay loans, estimated value of the underlying collateral,
and current and expected market conditions. The allowance for loan losses was
$387,000 and $338,000 at June 30, 1998 and 1997, respectively. The provision for
loan losses was $63,000 and $21,000 for the years ended June 30, 1998 and 1997,
respectively. Based on a historical trend of limited losses on residential loans
and nonresidential loans, the amount of the loan loss provision allocated to all
loan types has
<PAGE>
remained relatively stable for the two periods. While the Bank maintains its
allowance for losses at a level which it considers to be adequate, there can be
no assurance that further additions will not be made to the loss allowances and
that such losses will not exceed the estimated amounts. The establishment of a
loan loss provision each period adversely impacts the Company's net earnings.
Non-Interest Earnings. Non-interest earnings increased $55,000 or 112% from
$49,000 for the year ended June 30, 1997 to $104,000 for the year ended June 30,
1998. This was primarily due to an increase in service charge income of $48,000
and miscellaneous income of $5,000.
Non-Interest Expense. Total non-interest expense increased $100,000 or 6% from
$1.8 million for the year ended June 30, 1997 to $1.9 million for the year ended
June 30, 1998. This increase was primarily due to an increase in compensation
expense of $138,000 from the hiring of additional staff to handle growth,
general salary increases and increases due to accruals for stock-based
compensation programs. Other factors were increases in occupancy costs of
$20,000, advertising costs of $14,000, data processing costs of $40,000, and
other operating costs of $124,000, offset by a decrease in insurance costs of
275,000. The decrease in insurance costs is due to the BIF\SAIF assessment for
the year ended June 30, 1997, discussed earlier. The increase in occupancy costs
is the result of increased small building repairs. The increase in other
operating costs is due to placing into service automatic teller machines.
Non-interest expense is expected to materially increase in future periods
primarily due to the expansion by the Bank in staffing, marketing and supplying
the main office expansion, the ATM machine and the drive-up teller that all
became operational within three months of the end of the 1998 fiscal year. The
increase in non- interest expense may result in a decrease in net income in
future periods due to this expansion and its related costs. The Company believes
that this expansion should enhance long term shareholder value and does not
expect the decrease in earnings to be as great in the future, assuming the
expansion begins to result in increased interest income and non-interest income.
The lag in time between the expansion and the hoped for increases in interest
income and non-interest income could be approximately two years. This statement
of beliefs concerning this expansion and the impact of this expansion on the
Company is a forward looking statement. The Private Securities Litigation Reform
Act of 1995 (the "Act") provides protection to the Company in making certain
forward looking statements that are accompanied by meaningful cautionary
statements that identify important factors that could cause actual results to
differ materially from the forward looking statement. It is expected that the
expansion will result in both increased net interest income after provision for
loan losses and increased other income. However, the increase in other expenses
will more than offset these other increases during the next two years. If the
expansion is successful, net interest income after provision for loan losses and
other income will increase in greater dollar amounts than the expected increase
in other expense. However, as with any expansion, if the new office or
additional personnel do not ultimately result in sufficient increased loan and
deposit activity and increased net interest and other income, these expenses
would continue to have an adverse effect on net income in future periods.
Income Tax Expense. Income tax expense increased $256,000 or 90% from $283,000
for the year ended June 30, 1997 to $539,000 for the year ended June 30, 1998.
This increase was primarily attributable to the increase in pre-tax earnings of
$497,000.
Comparison of Operating Results for Years Ended June 30, 1997 and 1996
General. Net earnings decreased $153,000 or 19% for the year ended June 30, 1997
from the year ended June 30, 1996. This decrease was primarily the result of an
increase in interest expense of approximately $1 million and an increase in
non-interest expense of $531,000 offset by an increase in interest earnings of
$1.2 million.
Total Interest Earnings. Total interest earnings increased $1.2 million or 25%
from $4.9 million for the year ended June 30, 1996 to $6.1 million for the year
ended June 30, 1997. The increase was primarily due to a $13.3 million increase
in the loan portfolio and a $6.8 million increase in mortgage-backed securities
activity.
<PAGE>
Interest Expense. Total interest expense increased $986,000 or 41% from $2.4
million for the year ended June 30, 1996 to $3.4 million for the year ended June
30, 1997. This increase was primarily due to an increase of $463,000 of interest
incurred on increased Federal Home Loan Bank advances and a general increase in
the deposit base of $11.8 million.
Provision for Losses on Loans. The Bank maintains an allowance for loan losses
based upon management's periodic evaluation of known and inherent risks in the
loan portfolio, past loss experience, adverse situations that may affect the
borrowers' ability to repay loans, estimated value of the underlying collateral,
and current and expected market conditions. The allowance for loan losses was
$339,000 and $309,000 at June 30, 1997 and 1996, respectively. The provision for
loan losses was $21,000 and $28,000 for the years ended June 30, 1997 and 1996,
respectively. Based on a historical trend of limited losses on residential loans
and nonresidential loans, the amount of the loan loss provision allocated to all
loan types has remained relatively stable for the two periods. While the Bank
maintains its allowance for losses at a level which it considers to be adequate,
there can be no assurance that further additions will not be made to the loss
allowances and that such losses will not exceed the estimated amounts. The
establishment of a loan loss provision each period adversely impacts the
Company's net earnings.
Non-Interest Earnings. Non-interest earnings increased $5,800 or 13% from
$43,000 for the year ended June 30, 1996 to $49,000 for the year ended June 30,
1997. This was primarily due to an increase in service charge income of $17,400,
offset by decreases in income from real estate operations and miscellaneous
income of $8,600 and a decrease in the gain on sold loans of $3,000.
Non-Interest Expense. Total non-interest expense increased $531,000 or 42% from
$1.3 million for the year ended June 30, 1996 to $1.8 million for the year ended
June 30, 1997. This increase was primarily due to an increase in compensation
expense of $221,000 from the hiring of additional staff to handle growth,
general salary increases and increases due to accruals for stock-based
compensation programs. Other factors were increases in insurance costs of
$225,000, occupancy costs of $38,000, advertising costs of $11,000, data
processing costs of $5,000, and other operating costs of $72,000, offset by a
decrease in professional fees of $31,000. The increase in insurance costs is due
to the BIF\SAIF assessment discussed earlier. The increase in occupancy costs is
the result of increased small building repairs. The increase in other operating
costs is due to placing into service automatic teller machines, and the decrease
in professional services is the result of a lesser need for services since the
completion of the conversion from mutual to stock ownership.
Income Tax Expense. Income tax expense decreased $149,000 or 35% from $432,000
for the year ended June 30, 1996 to $283,000 for the year ended June 30, 1997.
This decrease was primarily attributable to the decrease in pre-tax earnings of
$153,000.
Liquidity and Capital Resources
The Company is required under applicable federal regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency, and other investments having maturities of five years or less.
Current OTS regulations require that a savings institution maintain liquid
assets of not less than 5% of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less, of which short-term
liquid assets must consist of not less than 1%. At June 30, 1998 the Bank's
liquidity, as measured for regulatory purposes, was 5.49%. The Bank adjusts
liquidity as appropriate to meet its asset/liability objectives.
<PAGE>
The Bank's primary sources of funds are deposits, borrowings, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities, and funds provided from operations. While scheduled loan repayments
are a relatively predictable source of funds, deposit flows and loan and
mortgage-backed security prepayments are significantly influenced by general
interest rates, economic conditions, and competition. In addition, the Bank
invests excess funds in overnight deposits which provide liquidity to meet
lending requirements and deposit fluctuations.
The Bank's most liquid assets are cash and cash equivalents, which include
investments in highly liquid short-term investments. The level of these assets
are dependent on the Bank's operating, financing, and investing activities
during any given period. At June 30, 1998, cash and cash equivalents totaled
$4.5 million. The Bank has another source of liquidity if a need for additional
funds should arise, that being FHLB of Dallas advances. The Bank also has the
ability to borrow against mortgage-backed and other securities. At June 30,
1998, the Bank had outstanding borrowings from the FHLB of Dallas of $38.2
million. These outstanding borrowings were used to purchase additional
mortgage-backed securities and mortgage loan participations as a means of
enhancing earnings.
The primary investment activity of the Bank is the origination of loans,
primarily mortgage loans. During the year ended June 30, 1998, the Bank
originated $63 million in total loans (including loan participations purchased),
of which $51 million were mortgage loans. Another investment activity of the
Bank is the investment of funds in U.S. Treasury and agency securities,
mortgage-backed securities, federal funds, readily marketable equity securities,
and FHLB of Dallas overnight funds. During periods when the Bank's loan demand
is limited, the Bank may purchase short term investment securities to obtain a
higher yield than otherwise available.
The Bank's cash flows are comprised of three primary classifications: cash flows
from operating activities, investing activities and financing activities. Cash
flows from operating activities, consisting principally of interest and
dividends received less interest paid on deposits, were $1 million and $517,000
for the years ended June 30, 1998 and 1997, respectively. Net cash used for
investing activities consisting primarily of disbursement of loan originations
and investment and mortgage-backed security purchases, offset by principal
collections on loans and proceeds from the maturities of investment securities,
were $28 million and $20 million for the years ended June 30, 1998 and 1997,
respectively. Net cash provided from financing activities consisting primarily
of net activity in deposit and escrow accounts and the proceeds received from
FHLB advances, were $28 million and $19 million for the years ended June 30,
1998 and 1997, respectively.
Cash flows from operating activities increased $483,000 or 93% from the year
ended June 30, 1997 to the year ended June 30, 1998. This increase was primarily
due to an increase in net earnings of $241,000 and the decrease in the
declaration of dividends to stockholders. For the same periods, cash flows used
by investing activities increased $9 million primarily due to an increase in net
loan originations. Cash flows provided from financing activities increased $9
million from the year ended June 30, 1997 to the year ended June 30, 1998
primarily due to an overall increase in deposits and a net increase in FHLB
borrowings of $8 million, offset by the repurchase of company stock under the
stock repurchase program.
<PAGE>
The Bank anticipates that it will have sufficient funds available to meet its
current commitments. As of June 30, 1998, the Bank had commitments to fund loans
of $4 million. Certificates of deposit scheduled to mature in one year or less
totaled $30 million. Based on historical withdrawals and outflows, on internal
monthly deposit reports monitored by management, and the fact that the Bank does
not accept any brokered deposits, management believes that a majority of
deposits will remain with the Bank. As a result, no adverse liquidity effects
are expected.
At June 30, 1998, the Bank exceeded each of the three OTS capital requirements
on a fully-phased in basis.
The Year 2000 Issue
By now almost everyone has heard about the Year 2000 computer problem. Every
major company has a potential problem caused by computer hardware and software
developed to use two digits to identify the year instead of four, i.e. 1995 is,
in many cases, input, stored, sorted, and calculated as "A95". Similarly, the
year 2000, being read as "A00", may be treated as the year 1900, thereby causing
a variety of problems such as the inability to compute payment due dates or
interest correctly. Rapid and accurate data processing is essential to the
operation of the Bank.
The Bank's Board of Directors has adopted an action plan for addressing the Year
2000 issue. The Board has also recently adopted a testing plan. An internal
committee has been appointed by the Board to manage these efforts. Management
has been charged with the responsibility of assuring Year 2000 compliance within
time frames dictated by sound business practice and the Federal Financial
Institutions Examination Council. Management reports to the Board of Directors
monthly on Year 2000 progress.
We have identified equipment and systems that may potentially be impacted. The
identification process included information technology and communication systems
such as personal computers, local area networks and servers, ATM's modems,
printers, copy machines, facsimile machines, telephones and the operating
systems and software for these systems. It also included non-information
technology systems, such as heating, air conditioning and vault controls, alarm
systems, surveillance systems, time clocks, coin and currency counters, and
postage meters. Contact has been made with all outside servicers and major
vendors to ascertain their individual levels of Year 2000 compliance. From
vendor responses and/or certifications of Year 2000 compliance we have
determined that the Bank should not be severely impacted by the Year 2000 from
these systems. This effort will continue and will include substantial testing
procedures.
The Bank is dependent on a service bureau for its major data processing
functions. Management is monitoring the service bureau's Year 2000 compliance
efforts closely. This monitoring includes membership and active participation in
a user group made up of client institutions of the service bureau. The service
bureau is already running Year 2000 compliant software. Four groups of other
users have completed intensive two-week testing periods with the service bureau
with excellent results. The Bank began its two-week testing period of this
software on September 28, 1998.
The Bank has contacted major borrowers in order to help them be aware of the
Year 2000 issue and to determine their state of readiness for the Year 2000. All
customers contacted have responded. At this point, the Bank has no reason to
doubt the ability of any of these customers to continue to operate effectively
in the Year 2000. Management believes that most of our residential borrowers are
not dependent on their computers for income. We also believe that non of our
commercial borrowers are so large that a Year 2000 problem would render them
unable to collect revenue or rent and in turn continue to make loan payments to
the Bank.
<PAGE>
The Bank has experienced considerable growth in recent years, which independent
of the Year 2000 issue, has created the need to upgrade some hardware and
software. The major upgrade, including new servers and operating system for
Banks local area network, personal computers, and off-the-shelf software, is
considered a normal result of the growth and rapid changes in technology. The
upgrade is in process and should be completed early in October 1998. A side
benefit of this upgrade will be a major improvement in Year 2000 compliance of
the systems being upgraded. The upgrade is not expected to have a material
effect on the financial performance of the Bank.
Senior management has developed and presented to the Board of Directors an
outline for a contingency plan to provide operating alternatives for
continuation of services to the Bank's customers in the event of systems or
communication failures at the beginning of the Year 2000. We expect to complete
the contingency plan by the end of October, 1998. Based on preliminary planning
during development of the contingency plan, management believes that the Bank
will be able to continue to operate in the Year 2000 even if some systems fail.
We expect to have available a back-up generator for use in the event of a power
failure. At the end of December 1999, we will generate paper and spreadsheet
backup of all customer and general ledger accounts. Due to the size of the Bank,
we believe that we would be able to operate with all transactions processed
manually until normal operations can be restored. This procedure could require
changing of schedules and hiring of temporary staff, which would increase cost
of operations. If this procedure were to continue for any extended per8iod of
time, or if we ultimately had to change data service providers, the cost could
be material.
No funds were spent for Year 2000 expense in the fiscal year ended June 30,
1998. The budget for the fiscal year ending June 30, 1999 includes $75,000 for
Year 2000 expense. In September 1998, the bank hired a full time data processing
systems administrator. Although he will have other duties, his primary duties
initially will be Year 2000 administration and testing, and his salary will be
allocated to Year 2000 expense.
We have identified some personal computers and software to be upgraded.
Management believes the $75,000 budget allocation for Year 2000 expense will
cover these costs as well as those for the systems administrator. Because
management expects to be Year 2000 compliant in almost all risk areas by June
30, 1999, Year 2000 costs for the fiscal year ending June 30, 2000 are not
expected to be material. Should the Bank have to resort to alternative operating
procedures due to major systems or communication failures at the beginning of
the Year 2000, the extra costs could be material.
In its Year 2000 Action Plan, the Bank identified seven phases as necessary to
implement a Year 2000 compliant system. The Bank is a federally chartered
financial institution regulated by the Office of Thrift Supervision ("OTS"). The
OTS identified five phases for Year 2000 compliance. The following list
describes the five phases as identified by the OTS with comparable phases from
the Bank's Year 2000 Action Plan identified in parentheses, if different:
1. Awareness -- Inform senior management of Year 2000 issues and possible
impact to the overall organization.
2. Assessment (Inventory, Assessment) -- Estimate the scope of the Year 2000
project and develop the budget for project execution. Develop a complete
inventory of hardware, software and systems, and categorize by importance.
3. Renovation (Analysis, Renovation) -- Perform a detailed analysis and
develop detailed plans for correction, testing and reimplementing critical
applications. Correct and replace all critical applications.
4. Validation (Testing) -- Test all critical applications unit and system
level.
5. Implementation -- Implement all critical applications and databases in a
production environment. Integration test.
<PAGE>
As of September 28, 1998 the following chart shows the current and projected
status of the Bank's Year 2000 compliance efforts:
Phase 9/28/98 10/15/98 12/31/98 3/31/99 6/30/99
- ----- ------- -------- -------- ------- -------
Awareness 100% -- -- -- --
Assessment 100% -- -- -- --
Renovation 85% 100% -- -- --
Validation 10% 60% 85% 100% --
Implementation 10% 60% 85% 95% 100%
Subsequent Events
In June, 1998,the Bank opened a newly constructed drive-up teller and automated
teller machine facility on a lot previously purchased for this purpose adjacent
to the present bank building. On September 14, 1998 the Bank moved its loan
operations into a new Loan Center across the street from its office. The 7000
sq. ft. building was leased for ten years with an option to purchase at a set
price. Management believes the additions will provide the Bank growth potential
by improving its ability to deliver retail banking services to the community.
Neither or these additions had a material impact on financial performance for
the Bank for the fiscal year ended June 30, 1998, but they will materially
increase non- interest expense for the Company during the fiscal year ending
June 30, 1999 and subsequent years.
The expected increase in non-interest expense due to the expansion of facilities
and services offered by the bank may result in a decrease in net income in
future periods. See "Non-interest Expense."
On August 18, 1998, the Company issued a press release announcing its intention
to repurchase up to 5 percent (58,276 shares) of the Company's common stock. The
repurchase was completed on September 9, 1998. On September 9, 1998, the Company
issued a press release announcing its intention to repurchase up to 5 percent
(55,363 shares) of the Company's common stock. As of September 24, 1998, 19,600
shares have been repurchased. All shares repurchased have been retired as
authorized but unissued. The Company believes that it has sufficient capital to
complete the repurchase and that the repurchase will not cause the Bank to fail
to meet its regulatory capital requirements.
Stock Repurchase Program
During the fiscal year ended June 30, 1998, the Company repurchased 35,500
shares of its $0.10 common stock under a stock repurchase program approved by
the OTS. All of the shares purchased under the program have been retired as
authorized but unissued. The Company believes that even with the repurchase
program, the Company has sufficient capital and that the Bank will be able to
continue to meet its regulatory capital requirements.
<PAGE>
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with Generally
Accepted Accounting Principles ("GAAP"), which require the measurement of
financial position and operating results primarily in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are financial. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the prices of goods and services.
Recent Legislation - Recapture of Post - 1987 Bad-Debt Reserves
The Small Business Job Protection Act of 1996, among other things, equalized the
taxation of thrifts and banks. The bill no longer allows thrifts a choice
between the percentage of taxable income method and the experience method in
determining additions to their bad debt reserves. Smaller thrifts with $500
million of assets or less are only allowed to use the experience method, which
is generally available to small banks currently. Larger thrifts must use the
specific charge off method regarding its bad debts. Any reserve amounts added
after 1987 are taxed over a six year period beginning in 1996; however, bad debt
reserves set aside through 1987 will generally not be taxed. Institutions can
delay these taxes for two years if they meet a residential - lending test. At
June 30, 1998, the Bank had $46,613 of post 1987 bad-debt reserves of which
1/6th or $9,323 was recaptured into taxable income for the year ended June 30,
1998. Future recapture of the Bank's bad-debt reserves will not have an adverse
effect on future net earnings.
New Accounting Standards
In October 1995, the FASB issued SFAS No. 123 "Statement on Accounting for
Stock-Based Compensation" which defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. The FASB encouraged all entities to adopt the fair value based
method, however, it allows entities to continue the use of the "intrinsic value
based method" prescribed by Accounting Principles Board ("APB") Opinion No. 25.
Under the intrinsic value based method, compensation cost is the excess of the
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock. However, most stock option plans have no intrinsic value
at the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The Bank has continued to use the "intrinsic
value based method" as prescribed by APB Opinion No. 25.
<PAGE>
In June 1996, the FASB issued SFAS No. 125, "Statement on Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. Effective
January 1, 1997, SFAS No. 125 will supersede SFAS No. 122, which is discussed
above. In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125." It defers for one year the
effective date of certain provisions of SFAS 125. Management has not yet
determined the effect, if any, SFAS No. 125 will have on the Company's financial
statements.
Recently the FASB issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share". It simplifies the standards for computing earnings per
share, superseding the standards previously found in Opinion 15. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
earnings per share computation. This Statement will affect the financial
statements issued by the Company after December 31, 1997.
The FASB recently issued Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about an Entity's Capital Structure". This Statement
applies to all entities. Its requirements are a consolidation of those found in
ABP Opinions 10 and 15, and Statement of Financial Accounting Standards No. 47.
This statement will affect the financial statements issued by the Company after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of comprehensive
income on its components (revenues, expenses, gains and losses). Comprehensive
income is defined as the change in equity of a business enterprise, during a
period, from transactions and other events and circumstances from nonowner
sources. The Statement requires that entities classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 31, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public entities report information about operating segments in
annual financial statements and requires that selected information about
operating segments be reported in interim financial reports as well. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for fiscal
years beginning after December 31, 1997.
<PAGE>
GFSB BANCORP, INC.
CONTENTS
Page
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS
Consolidated Statements of Financial Condition 2
Consolidated Statements of Earnings 4
Statements of Cash Flows 6
Notes to Financial Statements 7
<PAGE>
Independent Auditors' Report
Board of Directors
GFSB Bancorp, Inc.
Gallup, New Mexico
We have audited the accompanying consolidated statement of financial condition
of GFSB Bancorp, Inc. (a Delaware corporation) and Subsidiary as of June 30,
1998, and the related consolidated statements of earnings, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements as of June 30, 1997 were
audited by other auditors whose report dated August 11, 1997, expressed an
unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of GFSB Bancorp, Inc.
and Subsidiary as of June 30, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
/s/Neff & Company, LLP
Albuquerque, New Mexico
August 14, 1998
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
June 30, 1998
1998
ASSETS
Cash and due from banks (Notes 1 and 20) $ 2,047,860
Interest-bearing deposits with banks (Notes 1 and 20) 2,490,120
Federal funds sold (Note 1 and 20) -
Available-for-sale investment securities (Notes 1 and 20) 5,188,095
Available-for-sale mortgage-backed
securities (Notes 1, 2 and 20) 33,551,219
Hold-to-maturity investment securities (Notes 3 and 20) 144,993
Stock of Federal Home Loan Bank,
at cost, restricted (Note 1) 1,965,200
Loans receivable, net, substantially
pledged (Notes 4 and 20) 75,836,642
Accrued interest and dividends
receivable (Notes 5 and 20) 675,485
Premises and equipment (Note 6) 1,035,668
Prepaid and other assets 205,422
Deferred tax asset (Notes 11 and 12) 68,377
-----------------
Total assets $ 123,209,081
==================
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
1998
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Transaction accounts (Notes 7 and 20) $ 6,979,785
Savings and now deposits (Notes 7 and 20) 13,901,860
Time deposits (Notes 7 and 20) 48,497,496
Accrued interest payable (Notes 1 and 20) 223,702
Advances from borrowers for taxes and insurance 225,597
Accounts payable and accrued liabilities 260,332
Deferred income taxes (Notes 1 and 12) 426,553
Dividends declared and payable 82,446
Advances from the Federal Home
Loan Bank (Notes 18 and 20) 38,247,631
Income taxes payable 154,757
---------------
Total liabilities 109,000,159
COMMITMENTS AND CONTINGENCIES
(Notes 4, 11, and 22) -
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 1,500,000
shares authorized; issued and outstanding 1,165,537
shares in 1998 and 800,708 in 1997 113,515
Preferred stock, $.10 par value, 500,000
shares authorized; no shares issued or outstanding -
Additional paid-in-capital 5,777,881
Unearned ESOP stock (Note 14) (415,695)
Retained earnings, substantially restricted (Note 9) 8,041,610
Unrealized gain on available-for-sale
securities, net of taxes (Note 1) 691,611
--------------
Total stockholders' equity 14,208,922
--------------
Total liabilities and stockholders' equity $ 123,209,081
===============
<PAGE>
<TABLE>
<CAPTION>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended June 30, 1998 and 1997
1998 1997
---------------- ---------------
<S> <C> <C>
INTEREST INCOME
Loans receivable (Notes 1 and 4)
Mortgage loans $ 5,001,240 3,493,788
Commercial loans 280,257 220,280
Share and consumer loans 308,605 178,877
Investment and mortgage-backed securities 2,492,849 2,053,688
Other interest-earning assets 175,959 132,071
--------------- ----------
Total interest earnings 8,258,910 6,078,704
INTEREST EXPENSE
Deposits (Note 7) 3,092,086 2,595,886
Advances from Federal Home Loan Bank 1,916,851 793,124
--------------- ----------
5,008,937 3,389,010
--------------- ----------
Net interest earnings 3,249,973 2,689,694
Provision for loan losses (Note 4) 63,217 20,794
--------------- ----------
Net interest earnings after
provision for loan losses 3,186,756 2,668,900
NON-INTEREST EARNINGS
Service charge income 85,796 38,464
Miscellaneous income 10,422 5,196
Net gains from sales of loans 7,685 4,979
--------------- ----------
Total non-interest earnings 103,903 48,639
NON-INTEREST EXPENSE
Compensation and benefits 972,663 835,312
Insurance (Note 8) 54,860 330,170
Other 373,679 239,240
Occupancy 166,125 146,252
Data processing 137,317 97,582
Professional fees 103,894 91,775
Advertising (Note 1) 49,845 45,942
Stock services 15,785 12,680
-------------- ----------
Total non-interest expense $ 1,874,168 1,798,953
-------------- ----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (CONTINUED)
Years Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Earnings before income taxes $ 1,416,491 918,586
INCOME TAX EXPENSE (Note 12)
Currently payable 586,988 319,159
Deferred provision (benefit) (47,706) (36,052)
--------------- --------------
539,282 283,107
--------------- --------------
Net earnings $ 877,209 635,479
=============== ==============
Basic net earnings per share .785 .514
Dilutive net earnings per share .761 .510
Weighted average number of common
shares outstanding - basic $ 1,117,647 1,237,268
=============== ==============
Weighted average number of common
shares outstanding - dilutive $ 1,153,244 1,246,273
=============== ==============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
Years Ended June 30, 1998 and 1997
Common Stock
-------------------------------
Shares Amount
<S> <C> <C>
Balance, June 30, 1996 $ 948,750 $ 91,080
Net earnings - -
Unrealized gain on available for sale
securities, net of taxes - -
Distribution of stock vested under the
management stock bonus plan (Note 16) - 408
Acquisition of common stock by the Company
under the stock repurchase plan (Note 16) (148,042) (14,804)
Released and committed to be released 11362.76
of shares of common stock owned by the
ESOP (Note 14) - -
Dividends declared and paid to stockholders - -
------------ ------------
Balance, June 30, 1997 800,708 76,684
------------ ------------
Net earnings - -
Unrealized gain on available for sale securities,
net of taxes - -
Distribution of stock vested under the management
stock bonus plan (Note 16) - 348
Acquisition of common stock by the Company
under the stock repurchase plan (Note 16) (35,500) (3,550)
Issuance of stock dividend (Note 21) 400,329 40,033
Released and committed to be released 9431.66
of shares of common stock owned by the
ESOP (Note 14) - -
Dividends declared and paid to stockholders - -
------------ ------------
Balance, June 30, 1998 $ 1,165,537 $ 113,515
============ ============
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
Unrealized Gain
Additional Unearned on Available
Paid-in ESOP Retained For Sale
Capital Stock Earnings Securities, net Total
------- ----- -------- --------------- -----
<S> <C> <C> <C> <C>
$ 8,486,822 (541,333) 7,199,360 127,547 15,363,476
- - 635,479 - 635,479
- - - 429,570 429,570
52,683 - - - 53,091
(2,322,262) - - - (2,337,066)
43,437 76,452 - - 119,889
- - (321,303) - (321,303)
- ---------------------------------------------------------------------------
6,260,680 (464,881) 7,513,536 557,117 13,943,136
- ---------------------------------------------------------------------------
- - 877,209 - 877,209
- - - 134,494 134,494
49,265 - - - 49,613
(577,763) - - - (581,313)
- - (40,033) - -
45,699 49,186 - - 94,885
- - (309,102) - (309,102)
- ---------------------------------------------------------------------------
$ 5,777,881 (415,695) 8,041,610 691,611 14,208,922
===========================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1998 and 1997
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 877,209 $ 635,479
Adjustments to reconcile net earnings to
net cash provided by operations:
Deferred loan origination fees (178,892) (128,265)
Gain on sale of sold loans (7,685) (4,979)
Provision for loan losses 63,217 20,794
Depreciation of premises and equipment 79,240 69,933
Amortization of investment and mortgage
backed securities premiums (discounts) 302,500 195,936
Stock dividend on FHLB stock (106,527) (48,200)
Release of ESOP stock 94,885 119,889
Stock compensation 51,704 53,091
Provision (benefit) for deferred income taxes (47,706) (36,052)
Net changes in operating assets and liabilities:
Accrued interest and dividends receivable (123,702) (151,467)
Prepaid and other assets (150,132) (5,885)
Accrued interest payable 70,653 49,542
Accounts payable and accrued and other liabilities 166,211 9,253
Income taxes payable (19,333) 65,161
Dividends declared and payable 7,031 (327,162)
------------ -----------
Net cash provided by operating activities 1,078,673 517,068
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of premises and equipment (437,658) (210,141)
Loan origination and principal repayment
on loans, net (23,691,353) (13,181,944)
Principal payments on mortgage-backed securities 10,028,831 6,078,761
Purchases of mortgage-backed securities (11,678,555) (12,790,892)
Purchases of available-for-sale securities (3,181,046) (125,941)
Maturities and proceeds from sale of available-
for-sale securities 2,190,000 700,000
Purchase of FHLB stock (798,373) (461,500)
------------ -----------
Net cash applied to investing activities (27,568,154) (19,991,657)
------------ -----------
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
<TABLE>
<CAPTION>
GFSB BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years Ended June 30, 1998 and 1997
1998 1997
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in transaction accounts, savings
and NOW deposits and time deposits $ 11,506,655 11,882,676
Net increase (decrease) in advances from borrowers
for taxes and insurance 49,849 1,216
Proceeds from FHLB advances 469,270,950 106,463,375
Repayments on FHLB advances (451,953,319) (96,387,375)
Purchase of GFSB Bancorp stock under the
stock repurchase plan in cash (581,313) (2,337,066)
Dividends paid or to be paid in cash (309,102) (321,303)
Price paid for vested management bonus stock
plan stock 49,613 -
-------------- -------------
Net cash provided by financing activities 28,033,333 19,301,523
-------------- -------------
Increase (decrease) in cash and cash equivalents 1,543,852 (173,066)
Cash and cash equivalents at beginning of year 2,994,128 3,167,194
-------------- ------------
Cash and cash equivalents at end of year $ 4,537,980 2,994,128
============== ============
Supplemental disclosures Cash paid during the year for:
Interest on deposits and advances $ 4,939,577 3,339,468
Income taxes 651,769 253,998
Change in unrealized gain, net of deferred taxes
on available-for-sale securities 134,494 429,570
Issuance of stock dividend 40,033 -
</TABLE>
The Notes to Financial Statements are an integral part of these statements.
<PAGE>
GFSB BANCORP, INC.
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of significant accounting policies consistently applied in the
preparation of the accompanying statements follows:
Organization and Operations. On February 1, 1995, the Board of Directors of
Gallup Federal Savings and Loan Association (the Association), adopted a Plan of
Conversion ("the conversion"). The conversion allowed the Association to convert
from a federal mutual savings and loan association to a federal stock savings
bank with the concurrent formation of a holding company (GFSB Bancorp, Inc.).
The conversion was approved by the Office of Thrift Supervision, the Securities
and Exchange Commission, and the members of the Association, and on June 29,
1995 the conversion became effective. The conversion was accomplished through
amendment of the Association's federal charter and the sale of the holding
company's common stock. The Association also changed its name to Gallup Federal
Savings Bank (the Bank).
GFSB Bancorp, Inc. (the Company) is a unitary savings and loan holding company
that was incorporated in March 1995 under the laws of the State of Delaware. The
Company acquired all of the common stock of GFSB on June 29, 1995 and the
Company also made its initial public offering of common stock. The Company
issued 948,750 shares of $.10 par value common stock at $10 per share. Net
proceeds, after deducting conversion expenses of $372,002 were $9,115,498.
Basis of Presentation. The accompanying consolidated financial statements
include the accounts of GFSB Bancorp and the Bank. All significant balances and
transactions between entities have been eliminated.
Cash and Cash Equivalents. Cash and cash equivalents include cash on hand, cash
items, amounts due from banks, amounts held with the Federal Reserve Bank,
interest bearing deposits with the Federal Home Loan Bank, and federal funds
sold. Generally, federal funds sold are purchased and sold for one-day periods.
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents. The amounts in each of these above categories are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------- ---------------
<S> <C> <C>
Cash on hand $ 458,407 374,957
Cash items 1,369 1,341
Amounts due from banks 1,344,454 1,074,096
Interest bearing deposits 2,490,120 1,121,191
Federal funds sold - 100,000
Federal Reserve Bank deposits 243,630 322,543
--------------- ------------
$ 4,537,980 2,994,128
=============== ============
</TABLE>
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
The amounts due from banks includes $36,076 held in trust by the Company for the
employees awarded stock under the Management Stock Bonus Plan. The amount
represents dividends earned on non-vested shares. See Note 16.
Available-for-Sale Investment Securities. Investment securities consist of stock
owned in the Federal Home Loan Mortgage Corporation ("FHLMC"), Federal Home Loan
Bank debentures, U.S. Government Securities, and mutual funds. The Company has
classified its investment portfolio and all mortgage-backed securities as
available for sale, and, accordingly, accounted for its investments at fair
value. The Company has recorded a net unrealized gain, net of deferred income
taxes, of $ 691,611 and $557,117 as an increase to equity at June 30, 1998 and
1997, respectively.
Realized gains and losses on the sale of investment securities are determined
using the specific identification method when such sales occur.
Available-for-Sale Mortgage-Backed Securities. All mortgaged-backed and related
securities are stated at fair value as they are classified as available-for-sale
securities.
Realized gains and losses on the sale of mortgaged-backed securities (when such
sales occur) are based on the specific identification method. All sales are made
without recourse.
At June 30, 1998, the Company had no outstanding commitments to sell any
securities.
Loans Receivable. Loans receivable that management has the intent and ability to
hold for the foreseeable future or until maturity or payoff are stated at unpaid
principal balances, less the allowance for loan losses, and net deferred loan
origination fees and discounts.
The allowance for loan losses is increased by charges to income and decreased by
charge-offs (net of recoveries). Management's periodic evaluation of the
adequacy of the allowance is based on past loan loss experience, known and
inherent risks in the portfolio, adverse situations that may affect the
borrower's ability to repay, estimated value of any underlying collateral, and
current economic conditions.
The Company establishes a specific loan allowance on an impaired loan if the
present value of the future cash flows discounted using the loan's effective
interest rate is less than the carrying value of the loan. An impaired loan can
be valued based upon its fair value or the market value of the underlying
collateral if the loan is primarily collateral dependent. The Company assesses
for impairment all loans delinquent more than 90 days.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance account is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent cash payments are received, until, in management's judgment, the
borrower's ability to make periodic principal and interest payments is back to
normal, in which case the loan is returned to accrual status.
Mortgage loans sold to others are not included in the accompanying statements of
financial condition. For the years ended June 30, 1998 and 1997, $519,500 and
$398,510, respectively, of loans have been sold. No servicing rights were
retained on these loans. Gains on the sale of these loans were $7,685 in 1998
and $4,979 in 1997.
Loan Origination Fees and Related Costs. Loan fees and certain direct loan
origination costs are deferred, and the net fee is recognized as an adjustment
to interest income using the interest method over the contractual life of the
loans. Historical prepayment experience for the Company is minimal for purposes
of adjusting the contractual life of the loans.
Foreclosed Real Estate. Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
foreclosure. The Company generally holds foreclosed assets as held for sale, and
accordingly, after foreclosure, such assets are carried at the lower of fair
value minus estimated costs to sell, or cost. Valuations are periodically
performed by management, and an allowance for losses is established by a charge
to operations if the fair value of a property does not exceed its cost.
Premises and Equipment. Land is carried at cost. Building, furniture, fixtures,
and equipment are carried at cost, less accumulated depreciation. Building,
furniture, fixtures, and equipment are depreciated using a straight-line method
over the estimated useful lives of the assets. Maintenance and repairs are
charged to earnings in the period incurred.
Income Taxes. Deferred income taxes are provided on temporary differences in the
recognition of income and expense for tax and financial reporting purposes.
These items consist principally of loan origination fees, depreciation,
compensation cost, and the bad debt reserve.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities as
measured by the enacted tax rates that will be in effect when these differences
reverse. The principal differences between assets and liabilities for financial
statement and tax purposes are accumulated depreciation of premises and
equipment, the reserve for delinquent interest, bad debt reserves, stock
compensation plans, the recognition of loan origination fees, and unrealized
holding gains and losses on available-for-sale securities. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes in the period of enactment.
The Small Business Job Protection Act of 1996 equalized the taxation of thrifts
and banks. The bill no longer allows thrifts a choice between the percentage of
taxable income method and the experience method in determining additions to bad
debt reserves. Small thrifts (such as the Company) are only allowed to use the
experience method. Any reserve amounts added after 1987 are now taxed over a six
year period. At June 30, 1998, the Company had $46,613 of post 1987 bad debt
reserves. Of this amount, $9,323 was recaptured into taxable income for 1998.
Reclassifications. Certain reclassifications have been made to the 1997
financial statements to conform to the 1998 presentation.
Earnings Per Share. Earnings per share have been computed on the basis of the
weighted average number of shares of common stock and common stock equivalents
outstanding for the year. The Company accounts for the shares acquired by its
ESOP in accordance with Statement of Position 93-6; shares controlled by the
ESOP are not considered in the weighted average shares outstanding until the
shares are committed for allocation to an employee's individual account.
Advertising. The Company expenses advertising costs as incurred. Such expenses
are shown in the consolidated statements of earnings; no amounts of advertising
are carried as assets.
Fair Value of Financial Instruments. The following methods and assumptions were
used by the Company in estimating fair values of financial instruments as
disclosed herein:
Cash and cash equivalents. - The carrying amount of cash and cash equivalents
approximate their fair value.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Available-for-sale and hold-to-maturity securities. - Fair values for securities
are based on quoted market prices.
Loans receivable. - For variable-rate loans that reprice frequently and have no
significant change in credit risk, fair values are based on carrying values.
Fair values for certain mortgage loans are based on quoted market prices of
similar loans sold in conjunction with securitization transactions. Fair values
for commercial real estate and commercial loans are estimated using discounted
cash flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. Fair values for impaired
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposit liabilities. - The fair values disclosed for demand deposits are, by
definition, materially equal to the amount payable on demand at the reporting
date (that is, their carrying amounts). The carrying amounts of fixed-term money
market accounts approximate their fair values at the reporting date. Fair values
for fixed-rate certificates of deposits are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Short-term borrowings. - The carrying amounts of short-term borrowings
approximate their fair values given that the borrowings are at the Bank's
current incremental borrowing rate.
Off-balance-sheet instruments. - Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counter parties' credit standings.
Financial Instruments. In the ordinary course of business the Company has
entered into off-balance-sheet financial instruments consisting of commitments
to extend credit and commercial letters of credit. Such financial instruments
are recorded in the financial statements when they are funded or related fees
are incurred or received.
Estimates. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
A substantial estimate for the Company is the allowance for loan losses. This
estimate could change substantially within a year if borrowers' ability to repay
or the estimated value of underlying collateral should decline dramatically.
<PAGE>
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Investment in Federal Home Loan Bank Stock. The Bank, as a member of the Federal
Home Loan Bank System, is required to maintain an investment in it's capital
stock of the Federal Home Loan Bank (FHLB) in an amount equal to the greater of
1 percent of its outstanding home loans or 5 percent of advances from the FHLB.
No ready market exists for the Federal Home Loan Bank Stock, and it has no
quoted market value.
NOTE 2. AVAILABLE-FOR-SALE MORTGAGE-BACKED SECURITIES
The carrying values and estimated fair values of available-for-sale
mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Principal Unamortized Amortized Holding Holding Fair
June, 30 1998 Balance Premiums Cost Gains Losses Value
------------- ------- -------- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
FNMA ARM
Certificates $ 25,490,114 875,564 26,365,678 145,831 (54,043) 26,457,466
FHLMC ARM
Certificates 2,180,880 60,117 2,240,997 23,277 (3,414) 2,260,860
GNMA ARM
Certificates 4,724,052 138,305 4,862,357 - (29,464) 4,832,893
--------------- ---------- ----------- ---------- ------------ ----------
$ 32,395,046 1,073,986 33,469,032 169,108 (86,921) 33,551,219
=============== ========== =========== ========== ============ ==========
</TABLE>
During the year ended June 30, 1998 and 1997, the Company did not have any
proceeds from the sales of mortgage-backed securities. At June 30, 1998, the
Company had pledged $7,505,626 (paid-down value) in mortgage-backed securities
to public entities who have on deposit amounts in excess of the federally
insured limit. The Company also had pledged $682,729 in mortgage-backed
securities to the Federal Reserve Bank for its Treasury Tax and Loan Account.
<PAGE>
NOTE 3. INVESTMENTS
The amortized cost and fair values of available-for-sale investment equity
securities and investments in debt securities are summarized as follows:
Available-for-sale investment securities:
<TABLE>
<CAPTION>
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Mutual funds 2,283,012 341 - 2,283,353
FHLB Debentures 1,009,724 - (29) 1,009,695
FHLMC Stock 7,786 1,026,836 - 1,034,622
Tax-exempt Securities 840,000 20,425 - 860,425
--------------------------------------------------------------------
$ 4,140,522 1,047,602 (29) 5,188,095
====================================================================
Hold-to-maturity securities:
Tax-exempt Securities $ 145,000 - (7) 144,993
====================================================================
</TABLE>
The amortized cost and fair value of all debt securities by contractual
maturity, are shown below. Expected maturities will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C> <C>
Hold to maturity
Due after one year through five years $ 145,000 144,993
=================================
Available for sale:
Due within one year $ 1,009,724 1,009,695
Due after one year through five years 840,000 860,425
Mutual funds 2,283,012 2,283,353
FHLMC stock 7,786 1,034,622
Mortgage-backed securities 33,469,032 33,551,219
---------------------------------
$ 37,609,554 38,739,314
=================================
</TABLE>
No investments were sold in 1998 or 1997. The 1998 change in the net unrealized
holding gains and losses recorded through the equity section is a net gain of
$134,494.
<PAGE>
NOTE 4. LOANS RECEIVABLE
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
First mortgage loans (principally conventional)
Principal balances
Secured by one-to-four family residences $ 46,746,639 31,984,280
Secured by other properties 14,750,022 10,405,439
Construction loans 2,973,700 3,811,079
Loan participations purchased 8,550,204 6,153,249
Share loans 955,367 1,113,175
Commercial loans 4,748,814 1,960,765
Consumer loans:
Unsecured 366,846 117,518
Secured by vehicles 1,226,109 522,902
Home equity lines 1,254,965 977,141
--------------------------------
81,572,666 57,045,548
Less
Undisbursed portion of loans (1,755,115) (1,382,895)
Loan participations sold (3,065,389) (2,961,052)
Net deferred loan origination fees (528,550) (340,610)
Allowance for loan losses (386,970) (339,062)
--------------------------------
$ 75,836,642 52,021,929
================================
</TABLE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Balance at beginning of year $ 339,062 309,117
Provision charged to income 106,591 20,794
Charge-offs, recoveries and other (58,683) 9,151
---------------------------------
Balance at end of year $ 386,970 339,062
=================================
</TABLE>
The Company has commitments to fund new loans as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- --------------
<S> <C> <C>
Fixed rate $ 1,762,000 4,117,118
Variable rate 836,000 2,070,468
Commitments for new originations 1,741,000 4,327,155
---------------------------------
Total $ 4,339,000 10,514,741
=================================
</TABLE>
<PAGE>
NOTE 4. LOANS RECEIVABLE (CONTINUED)
Fixed rate commitments for the years ended June 30, 1998 had interest rates that
ranged from 6.83 percent to 11.50 percent.
Nonaccrual and renegotiated loans for which interest has been reduced totaled
$707,632 and $136,921 at June 30, 1998 and 1997, respectively. Interest income
that was foregone amounted to $33,755 and $10,546 at June 30, 1998 and 1997,
respectively.
The weighted average rate for the loan portfolio at June 30, 1998, is 9.59
percent.
The Company establishes a specific allowance on impaired loans and disclosure of
the Company's method of accounting for interest income on impaired loans. The
Bank assesses all loans delinquent more than 90 days for impairment and such
loans amounted to $707,632 at June 30, 1998. Average balances for loans
delinquent more than 90 days totaled approximately $53,956 for the year ended
June 30, 1998. These loans are all primarily collateral dependent and management
has determined that the underlying collateral is in excess of the carrying
amount. As a result, the Company has determined that specific allowances on
these loans is not required.
NOTE 5. ACCRUED INTEREST AND DIVIDENDS RECEIVABLE
Accrued interest and dividends receivable is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loans receivable $ 444,334 333,503
Available-for-sale investment securities 23,823 14,041
Available-for-sale mortgage-backed securities 207,328 204,239
---------------------------------
$ 675,485 551,783
=================================
</TABLE>
<PAGE>
NOTE 6. PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Buildings $ 522,400 522,400
Furniture, fixtures, and equipment 480,019 453,008
Construction-in-progress 412,837 2,190
Land 158,550 158,550
Parking lot improvements 5,265 5,265
---------------------------------
1,579,071 1,141,413
Less allowance for depreciation (543,403) (464,163)
---------------------------------
$ 1,035,668 677,250
=================================
</TABLE>
NOTE 7. DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate at June 30, 1998
June 30, ----------------------------------
1998 Amount Percent
<S> <C> <C> <C>
Passbook savings
accounts 3.00% $ 4,229,908 6.10%
Money market
accounts 3.97 9,671,952 13.94
Transaction accounts 1.20 6,979,785 10.06
--------------------------------
$ 20,881,645 30.10
================================
</TABLE>
<PAGE>
NOTE 7. DEPOSITS (CONTINUED)
Deposits are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Rate at June 30, 1998
June 30, --------------------------------
1998 Amount Percent
<S> <C> <C> <C>
Certificates of deposit:
2.50%-6.00% 5.41% $ 41,661,400 60.05%
6.00%-7.00% 6.27 5,870,903 8.46
7.00%-8.00% 7.21 965,193 1.39
--------------------------------
48,497,496 69.90
--------------------------------
$ 69,379,141 100.00%
================================
</TABLE>
The aggregate amount of jumbo certificates with a minimum denomination of
$100,000 was $21,799,145 at June 30, 1998.
Certificates of deposit by maturity dates are as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- ------------
<S> <C> <C>
3 months or less $ 8,528,450 7,242,578
3 months to 6 months 6,768,370 6,611,010
6 months to 1 year 14,674,734 14,951,461
1 year to 2 years 15,433,404 8,305,334
2 years to 3 years 1,707,965 1,906,082
Thereafter 1,384,573 3,760,553
----------------------------------
$ 48,497,496 42,777,018
=================================
</TABLE>
Interest expense on deposits is summarized as follows:
<TABLE>
<CAPTION>
1998 1997
---------------- -------------
<S> <C> <C>
Certificates of deposit $ 2,598,370 2,140,115
Money market accounts 324,341 334,958
Passbook savings 107,399 86,648
Transaction deposits 61,976 34,165
---------------------------------
$ 3,092,086 2,595,886
=================================
</TABLE>
<PAGE>
NOTE 8. SAVINGS ASSOCIATION INSURANCE FUND
The Economic Growth and Paperwork Reduction Act of 1996 was signed into law on
September 30, 1996. The Act provided for the resolution of the premium disparity
between the Bank Insurance Fund ("BIF") and the Savings Association Insurance
Fund ("SAIF"). In order to capitalize the SAIF, a one-time special assessment of
65.7 basis points had to be paid by SAIF insured institutions. As a result, the
Company paid a one-time assessment of $250,257. The Company recorded the
one-time assessment as a charge to 1997 operations as "Insurance".
NOTE 9. REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS
The Bank is subject to certain restrictions on the amount of dividends that it
may declare without prior regulatory approval. The Bank is also subject to
various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios set forth in the table
below. Management believes, as of June 30, 1998 that the Bank meets all capital
adequacy requirements to which it is subject.
Current regulations require institutions to have a minimum regulatory tangible
capital equal to 1.5 percent of total assets, a minimum 3 percent leverage
capital ratio and an 8 percent risk-based capital ratio.
<PAGE>
NOTE 9. REGULATORY MATTERS AND RESTRICTIONS ON RETAINED
EARNINGS (CONTINUED)
The Bank at June 30, 1998, meets the regulatory tangible capital and core
capital requirements and the risk-based capital requirement of 8 percent of
total risk-adjusted assets. The following is a reconciliation of net worth to
regulatory capital as reported in the June 30, 1998 report to the Office of
Thrift Supervision ("OTS"):
<TABLE>
<CAPTION>
1998
-----------------
<S> <C>
Regulatory net worth per report to OTS $ 12,350,868
Audit adjustments
Increase in income taxes (15,835)
Increase in other operating expense (4,591)
Decrease in interest expense 47,044
---------------
Net worth as reported per the
accompanying financial
statements (Bank only) $ 12,377,486
===============
</TABLE>
The following is a reconciliation of the Bank's capital in accordance with
generally accepted accounting principles (GAAP) to the three components of
regulatory capital calculated under regulatory requirements at June 30, 1998 (in
thousands):
<TABLE>
<CAPTION>
June 30, 1998
----------------------------------------------
Tangible Capital Core Capital Risk-Based Capital
-------------------------- ---------------------- -------------------
Amount Percent Amount Percent Amount Percent
<S> <C> <C> <C> <C> <C> <C>
GAAP Capital $ 12,377,486 - $ 12,377,486 -% $12,377,486 %
Unrealized (gains)
losses on available-
for-sale securities (691,611) - (691,611) - (691,611) -
Qualifying general
loan loss allowance - - - (386,970) -
----------------------------------------------------------------------------
Regulatory capital
computed 11,685,875 9.51% 11,685,875 9.51% 11,298,905 18.59%
Minimum capital
requirement 1,843,682 1.50% 3,687,364 3.00% 5,012,000 8.00%
----------------------------------------------------------------------------
Regulatory capital
excess $ 9,842,193 8.01% $ 7,998,511 8.01% $ 6,286,905 10.59%
===================================================== ======================
</TABLE>
<PAGE>
NOTE 10. RELATED PARTY TRANSACTIONS
The Company has several loans receivable from related parties. The Company's
policy is that all such loan transactions be on the same terms, including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with others.
A summary of the activity for outstanding loans receivable to related parties is
as follows:
<TABLE>
<CAPTION>
1998 1997
--------------- --------------
<S> <C> <C>
Balance, beginning of year $ 1,190,435 1,426,679
New loans 181,956 422,881
Repayments (575,867) (659,125)
---------------------------------
Balance, end of year $ 796,524 1,190,435
=================================
</TABLE>
The Company also has several deposits from related parties. Outstanding deposits
from related parties at June 30, 1998 amounted to $1,079,393. The Company also
expensed $172,154 and $156,623 for the years ended June 30, 1998 and 1997,
respectively, for directors fees and compensation under the management stock
bonus plan.
As described in Note 22, the Company leases a building located across the street
from its office from a related party.
NOTE 11. CONCENTRATIONS OF CREDIT RISK
The Company is active in originating primarily first mortgage loans primarily in
McKinley County, New Mexico. At June 30, 1998, the Company had $76,752,162 of
loans outstanding and unfunded commitments of $4,339,000. Significant loans are
approved by the Board of Directors through its loan committee. Collateral is
required on all real estate loans, substantially all commercial loans, and the
majority of consumer loans. Real estate exposure is primarily limited to the
county in which the Company operates. The Company generally maintains loan to
value ratios of no greater than 80 percent.
The Company maintains its cash balances with other financial institutions. The
balances on deposit with other banks are insured by the Federal Deposit
Insurance Corporation up to $100,000.
<PAGE>
NOTE 12. INCOME TAXES
Income tax expense consists of:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Current
Federal $505,046 $ 280,336
State 81,942 38,823
-------- --------
586,988 319,159
Deferred provision (benefit)
Federal $ (41,982) $ (30,645)
State (5,724) (5,407)
--------- ---------
(47,706) (36,052)
$ 539,282 $ 283,107
--------- ---------
</TABLE>
Deferred taxes consist of temporary differences arising from book tax
differences in depreciation, recognition of loan origination fees, compensation
costs and reserve for bad debts.
The Company has recorded a valuation allowance against the net deferred tax
receivable in 1998 relating to the receivable arising from the book bad debt
reserve. The change in the valuation allowance from 1997 was $19,175.
The Company has also recorded a deferred tax liability of $426,553 at June 30,
1998 in connection with the adoption of Statement of Financial Accounting
Standards No. 115. The deferred tax liability is the result of the unrealized
holding gains on available-for-sale securities. The deferred tax liability has
been recorded as a reduction to the unrealized holding gain and reported as a
separate component of equity as required by Statement No. 115.
<PAGE>
NOTE 12. INCOME TAXES (CONTINUED)
The reconciliation of income tax attributable to continuing operations computed
at the U.S. federal statutory rates to income tax expense is:
<TABLE>
<CAPTION>
<S> <C> <C>
Tax at U.S. statutory rate of 34 percent $481,607 312,319
State income taxes, net of federal
tax benefit 64,877 25,623
Other - net (7,202) (54,835)
--------- -------
$539,282 281,107
========= =======
Effective tax rate 38% 31%
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to six irrevocable letters of credit which total
$114,000. The Bank's exposure to credit loss in the event of nonperformance by
the other party to the letters of credit are represented by the contractual
notional amount of the letters of credit. The Company uses the same credit
policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
NOTE 14. EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion (see Note 1), the Company adopted an Employee
Stock Ownership Plan (ESOP) for the benefit of all of its full time employees.
Contributions to the Plan are determined at the discretion of the Company and
are limited to the maximum amount deductible for income tax purposes. Eligible
employees include all full time employees with a minimum of one year of service
as of any anniversary date of the Plan. The ESOP purchased 84,000 (as adjusted
for the stock dividend) common shares of the Company's stock issued in the
conversion, which was funded by a $560,000 loan from the Company. In accordance
with Statement of Position 93-6, the unpaid balance of the ESOP loan has been
eliminated on the Company's consolidated statement of financial condition.
Stockholders' equity has been reduced by the aggregate purchase price of the
shares owned by the ESOP, net of the shares committed to be released.
Contributions to the ESOP by the Company are made to fund the principal and
interest payments on the debt of the ESOP. As of June 30, 1998, 17,747.9844 ESOP
shares were released, and for the year ended June 30, 1998, $94,875 in
contributions were made to the ESOP by the Company. As of June 30, 1997,
7,575.1762 ESOP shares were released and contributions of $122,644 were made to
the Plan by the Company. The remaining unallocated ESOP shares at June 30, 1998
was 66,252.0156. The fair value of the remaining unallocated shares at June 30,
1998 is $1,060,032.
<PAGE>
NOTE 14. EMPLOYEE STOCK OWNERSHIP PLAN (CONTINUED)
Dividends on unallocated ESOP shares are recorded as additional contributions to
the ESOP by the Company to prepay principal on the ESOP loan and release
additional shares. Dividends on allocated shares are charged to retained
earnings.
NOTE 15. NEW ACCOUNTING STANDARDS
In October 1995, the FASB issued SFAS No. 123 "Statement on Accounting for
Stock-Based Compensation" which defines a "fair value based method" of
accounting for an employee stock option whereby compensation cost is measured at
the grant date based on the value of the award and is recognized over the
service period. The FASB encouraged all entities to adopt the fair value based
method, however, it allows entities to continue the use of the "intrinsic value
based method" prescribed by Accounting Principles Board ("APB") Opinion No. 25.
Under the intrinsic value based method, compensation cost is the excess of the
market price of the stock at the grant date over the amount an employee must pay
to acquire the stock. However, most stock option plans have no intrinsic value
at the grant date and, as such, no compensation cost is recognized under APB
Opinion No. 25. Entities electing to continue use of the accounting treatment of
APB Opinion No. 25 must make certain pro forma disclosures as if the fair value
based method had been applied. The Bank has continued to use the "intrinsic
value based method" as prescribed by APB Opinion No. 25.
In June 1996, the FASB issued SFAS No. 125, "Statement on Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities",
which will be effective, on a prospective basis, for fiscal years beginning
after December 31, 1996. SFAS No. 125 provides accounting and reporting
standards for transfers and servicing of financial assets and extinguishment of
liabilities based on consistent application of a financial-components approach
that focuses on control. SFAS No. 125 extends the "available for sale" and
"trading" approach of SFAS No. 115 to non-security financial assets that can be
contractually prepaid or otherwise settled in such a way that the holder of the
asset would not recover substantially all of its recorded investment. In
addition, SFAS No. 125 amends SFAS No. 115 to prevent a security from being
classified as held to maturity if the security can be prepaid or settled in such
a manner that the holder of the security would not recover substantially all of
its recorded investment. The extension of the SFAS No. 115 approach to certain
non-security financial assets and the amendment to SFAS No. 115 are effective
for financial assets held on or acquired after January 1, 1997. Effective
January 1, 1997, SFAS No. 125 will supersede SFAS No. 122, which is discussed
above. In December 1996, the FASB issued SFAS No. 127 "Deferral of the Effective
Date of Certain Provisions of SFAS No. 125." It defers for one year the
effective date of certain provisions of SFAS 125. Management has not yet
determined the effect, if any, SFAS No. 125 will have on the Company's financial
statements.
<PAGE>
NOTE 15. NEW ACCOUNTING STANDARDS (CONTINUED)
Recently the FASB issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share". It simplifies the standards for computing earnings per
share, superseding the standards previously found in Opinion 15. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires dual presentation of basic and diluted earnings per
share on the face of the income statement for all entities with complex capital
structures and requires a reconciliation of the numerator and denominator of the
basic earnings per share computation to the numerator and denominator of the
earnings per share computation. This Statement will affect the financial
statements issued by the Company after December 31, 1997.
The FASB recently issued Statement of Financial Accounting Standards No. 129,
"Disclosure of Information about an Entity's Capital Structure". This Statement
applies to all entities. Its requirements are a consolidation of those found in
ABP Opinions 10 and 15, and Statement of Financial Accounting Standards No. 47.
This statement will affect the financial statements issued by the Company after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This Statement establishes standards for reporting and display of comprehensive
income on its components (revenues, expenses, gains and losses). Comprehensive
income is defined as the change in equity of a business enterprise, during a
period, from transactions and other events and circumstances from nonowner
sources. The Statement requires that entities classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital in the equity section of a statement of
financial position. This Statement is effective for fiscal years beginning after
December 31, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." This Statement establishes standards for
the way that public entities report information about operating segments in
annual financial statements and requires that selected information about
operating segments be reported in interim financial reports as well. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. This Statement is effective for fiscal
years beginning after December 31, 1997.
<PAGE>
NOTE 16. STOCK PLANS
At June 30, 1998, the Company has two stock-based compensation plans, which are
described below. The Company applies APB Opinion 25 and related Interpretations
in accounting for its plans. Accordingly, no compensation cost has been
recognized for its Stock Option Plan. The compensation cost that has been
charged against income for the Management Stock Bonus Plan is discussed below.
Had compensation cost for the Company's two stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below.
<TABLE>
<CAPTION>
1998 1997
--------------- -------------
<S> <C> <C> <C>
Net income As reported $ 877,209 635,479
Pro forma 803,304 563,286
Earnings per share As reported $ .785 .514
Pro forma .719 .455
</TABLE>
On January 5, 1996, the Board of Directors of the Company adopted a Stock Option
Plan. Pursuant to the Plan, an amount of stock equal to 10 percent of the shares
of common stock (142,313 shares as adjusted for the stock dividend) of the
Corporation issued and outstanding is reserved for issuance by the Company upon
exercise of stock options which may be granted to directors, officers, and other
key employees from time to time. The Plan provides for both Incentive Stock
Options and Non-Incentive Stock Options. The options have an exercise date of
ten years from the date of grant. In connection with the adoption of the Plan,
the Company granted 37,500 incentive stock options and 42,693 non-incentive
stock options to its directors, officers, and other key employees. The option
price established for the shares upon exercise was $9 1/4 per share. During the
year, an additional 13,125 incentive stock options were granted and 8,700
incentive stock options were forfeited. As of June 30, 1998 and 1997, no shares
have been exercised. Remaining shares available to be granted in the future
amount to 57,695. The fair value of each option grant for the above proforma
disclosures is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted - average assumptions:
dividends of $0.10 per quarter; expected volatility of 54 percent; risk-free
interest rate of 5.10 percent; and expected lives of 8 and 7 years.
The Company also adopted a Management Stock Bonus Plan on January 5, 1996.
Sufficient funds were contributed to the Plan representing up to 4 percent of
the aggregate number of shares issued in the conversion. Awards under the Plan
are determined based on the position and responsibilities of the employees, the
length and value of their services, and the compensation paid to employees. On
January 5, 1996, the Company made awards under the Plan in the amount of 30,573
shares. The award price established
<PAGE>
NOTE 16. STOCK PLANS (CONTINUED)
for the shares upon exercise was $9 1/4 per share. At June 30, 1998 and 1997,
27,852 and 26,352 shares, respectively, remain to be awarded under the Plan in
the future. During the year, 1,500 shares were forfeited. Awards under the Plan
are earned at the rate of one-fifth of the award per year as of the one-year
anniversary of the effective date of the Plan. For the years ended June 30, 1998
and 1997, compensation cost in the amount of $51,704 and $60,494, respectively,
have been recorded under the provisions of the Plan. The fair value of each
option grant for the above proforma disclosures is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted -
average assumptions: dividends of $0.10 per quarter ($0.075 per quarter after
stock dividend); expected volatility of 54 percent; risk-free interest rate of
5.10 percent; and expected lives of 8 and 7 years.
During the 1997 fiscal year, the Company implemented a stock repurchase program.
The program was approved by the Company's Board of Directors and the OTS. The
repurchase program authorized the Company to repurchase approximately 15 percent
of its currently outstanding shares. As of June 30, 1998 and 1997, the Company
has repurchased 35,500 and 148,042 shares of its outstanding common stock for
$581,312 and $2,377,066, respectively. The shares purchased by the Company were
retired at the advice of special counsel.
NOTE 17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the years
ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 Quarter Ended
---------------------------------------------------------------------
September 30 December 31 March 31 June 30
<S> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 706,339 783,871 846,270 850,276
Other income 19,177 22,065 23,070 39,591
Other expenses 442,873 427,798 447,072 556,425
Earnings before
income taxes 282,643 378,138 406,509 349,201
Net earnings 179,279 232,001 251,171 214,758
Earnings per common
share 0.160 0.208 0.225 0.192
</TABLE>
<TABLE>
<CAPTION>
1997 Quarter Ended
--------------------------------------------------------------------
September 30 December 31 March 31 June 30
<S> <C> <C> <C> <C>
Net interest income after
provision for loan losses $ 669,227 656,787 637,499 705,387
Other income 14,217 9,181 11,249 13,992
Other expenses 625,051 422,513 371,503 379,886
Earnings before
income taxes 58,393 243,455 277,246 339,492
Net earnings 34,640 146,062 171,471 283,306
Earnings per common
share .028 .118 .139 .229
</TABLE>
<PAGE>
NOTE 18. FEDERAL HOME LOAN BANK ADVANCES
In October 1995, the Bank entered into an "Advances, Collateral Pledge and
Security Agreement" (the Agreement) with the Federal Home Loan Bank (FHLB). The
purpose of the Agreement is to allow the Bank to obtain extensions of credit
from the FHLB to use in its operations. At June 30, 1998, the Bank has
$38,247,631 in outstanding advances with the FHLB. The advances bear interest
and mature as follows:
<TABLE>
<CAPTION>
Unpaid principal balance Interest Rate Maturity
<S> <C> <C> <C>
$ 400,000 5.57% July 01, 1998
600,000 5.62% July 01, 1998
4,550,000 5.58% July 01, 1998
400,000 5.62% July 08, 1998
750,000 5.59% July 08, 1998
4,600,000 5.52% July 08, 1998
650,000 5.59% July 15, 1998
4,900,000 5.59% July 15, 1998
3,775,000 5.55% July 22, 1998
3,775,000 5.55% July 29, 1998
565,250 5.813% September 09, 1998
700,000 5.813% September 09, 1998
5,000,000 5.663% October 02, 2002
650,000 5.78% December 16, 2002
6,000,000 4.96% December 12, 2007
288,192 5.54% February 01, 2005
644,189 5.79% February 01, 2018
----------------
$ 38,247,631
----------------
</TABLE>
Several of the advances due in July were subsequently refinanced after year end.
The advances are secured by the Bank's investment in FHLB stock of $1,965,200
and FNMA mortgage-backed securities in the amount of $6,486,829. In addition,
the advances are secured under a "blanket credit facility" whereby all of the
Bank's 1-4 family real estate loans are also collateral under the advance
agreement.
<PAGE>
NOTE 19. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS
The following represents the details of consolidation with respect to GFSB
Bancorp, Inc. and the Bank:
Details of Consolidated Statement of Financial Condition
June 30, 1998
ASSETS
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
<S> <C> <C> <C> <C>
Cash and due from banks $ - 2,047,860 - 2,047,860
Interest-bearing deposits
with banks - 2,490,120 - 2,490,120
Available-for-sale investment
securities - 5,188,095 - 5,188,095
Mortgage-backed securities - 33,551,219 - 33,551,219
Stock of Federal Home Loan
Bank, at cost, - 1,965,200 - 1,965,200
Loans receivable, net 2,409,454 75,836,642 (2,409,454) 75,836,642
Accrued interest and dividends
receivable - 675,485 - 675,485
Premises and equipment, net - 1,035,668 - 1,035,668
Prepaid and other assets 442 204,979 - 205,421
Deferred tax asset - 68,377 - 68,377
Investment in subsidiary 4,557,750 442,817 (5,000,567) -
-----------------------------------------------------------------------
Total assets $ 6,967,646 123,651,456 (7,410,021) 123,209,081
=======================================================================
</TABLE>
<PAGE>
NOTE 19. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Details of Consolidated Statement of Financial Condition (Continued) June 30,
1998
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
<S> <C> <C> <C> <C>
Transaction accounts $ - 6,979,785 - 6,979,785
Savings and now deposits - 13,921,170 (19,310) 13,901,860
Time deposits - 48,497,496 - 48,497,496
Accrued interest payable - 223,702 - 223,702
Advances from borrowers - 225,597 - 225,597
Accounts payable and accrued
liabilities 52,029 208,303 - 260,332
Deferred income taxes - 426,553 - 426,553
Advances from parent company - 2,170,359 (2,170,359) -
Dividends declared and payable 82,446 219,785 (219,785) 82,446
Advances from the Federal Home
Loan Bank - 38,247,631 - 38,247,631
Income taxes payable 1,168 153,589 - 154,757
-----------------------------------------------------------------------
Total liabilities 135,643 111,273,970 (2,409,454) 109,000,159
COMMITMENTS AND
CONTINGENCIES - - - -
STOCKHOLDERS' EQUITY
Common stock 116,553 10,000 (13,038) 113,515
Paid-in-capital 6,217,660 4,547,750 (4,987,529) 5,777,881
Unearned ESOP stock (415,695) - - (415,695)
Retained earnings, substantially
restricted 913,485 7,128,125 - 8,041,610
Unrealized gain on available
for sale securities, net of taxes - 691,611 - 691,611
-----------------------------------------------------------------------
Total stockholders'
equity 6,832,003 12,377,486 (5,000,567) 14,208,922
-----------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 6,967,646 123,651,456 (7,410,021) 123,209,081
=======================================================================
</TABLE>
<PAGE>
NOTE 19. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Details of Consolidated Statement of Earnings
Year ended June 30, 1998
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans receivable
Mortgage loans$ - 5,001,239 - 5,001,240
Commercial loans - 280,257 - 280,257
Share and consumer loans - 308,605 - 308,605
Available-for-sale investment
securities and mortgage-
backed securities - 2,492,849 - 2,492,849
Other interest-earning assets 145,084 175,959 (145,084) 175,959
-----------------------------------------------------------------------
Total interest earnings 145,084 8,258,910 (145,084) 8,258,910
INTEREST EXPENSE
Deposits - 3,093,568 (1,482) 3,092,086
Advances from Federal
Home Loan Bank - 1,916,851 - 1,916,851
Advances to parent company - 102,736 (102,736) -
-----------------------------------------------------------------------
- 5,113,155 (104,218) 5,008,937
-----------------------------------------------------------------------
Net interest earnings 145,084 3,145,755 (40,866) 3,249,973
Provision for loan losses - 63,217 - 63,217
-----------------------------------------------------------------------
Net interest earnings
after provision for
loan losses 145,084 3,082,538 (40,866) 3,186,756
NON-INTEREST EARNINGS
Miscellaneous income - 10,422 - 10,422
Dividend income from subsidiary 943,066 - (943,066) -
Net gains from sales of loans - 7,685 - 7,685
Service charge income - 85,796 - 85,796
-----------------------------------------------------------------------
Total non-interest
earnings 943,066 103,903 (943,066) 103,903
</TABLE>
<PAGE>
NOTE 19. DETAILS OF CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Details of Consolidated Statement of Earnings (Continued)
Year ended June 30, 1998
<TABLE>
<CAPTION>
Gallup GFSB
GFSB Federal Bancorp,
Bancorp, Savings Inc. and
Inc. Bank Eliminations Subsidiary
<S> <C> <C> <C> <C>
NON-INTEREST EXPENSE
Compensation and benefits $ 133,462 880,067 (40,866) 972,663
Insurance - 54,860 - 54,860
Other 47,519 326,160 - 373,679
Occupancy - 166,125 - 166,125
Data processing - 137,317 - 137,317
Professional fees 37,979 65,915 - 103,894
Advertising - 49,845 - 49,845
Stock services 15,785 - - 15,785
----------------------------------------------------------------------
Total non-interest
expense 234,745 1,680,289 (40,866) 1,874,168
Earnings before income taxes 853,405 1,506,152 (943,066) 1,416,491
Income tax expense
Currently payable - 539,282 - 586,988
Deferred (benefit) - (47,706) - (47,706)
----------------------------------------------------------------------
- 539,282 - 539,282
----------------------------------------------------------------------
Net earnings $ 853,405 966,870 (943,066) 877,209
=======================================================================
</TABLE>
<PAGE>
NOTE 20. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments were as
follows:
<TABLE>
<CAPTION>
June 30, 1998
---------------------------------
Carrying Fair
Value Value
<S> <C> <C>
Financial Assets:
Cash and due from banks $ 2,047,860 2,047,860
Interest-bearing deposits with banks 2,490,120 2,490,120
Available-for-sale-investment securities 5,188,095 5,188,095
Hold-to-maturity investment securities 144,993 144,993
Available-for-sale mortgage-backed securities 33,551,219 33,551,219
Loans receivable, net 75,836,642 60,754,721
Accrued interest receivable 675,485 675,485
Financial Liabilities:
Transaction deposits 6,979,785 6,979,785
Savings and now deposits 13,901,860 13,901,860
Time deposits 48,497,496 47,209,079
Accrued interest payable 223,702 223,702
Advances from the FHLB 38,247,631 38,247,631
Off-Balance-Sheet Liabilities:
Commitments to extend credit 4,339,000
</TABLE>
NOTE 21. COMMON STOCK DIVIDENDS DECLARED
On March 12, 1998, a fifty percent stock dividend was declared to shareholders
of record as of March 31, 1998. As a result of the stock dividend, 400,329
shares were issued.
Earnings per share amounts and weighted average shares outstanding have been
restated in 1997 to give effect of the stock dividend.
<PAGE>
NOTE 22. LEASES
The Company is obligated under a lease agreement entered into on December 30,
1997, with a related party (see Note 10) for the building across the street from
its offices. Rental expense for the year ended June 30, 1998, was $15,000.
The following is a schedule of noncancelable future minimum lease payments
required under the operating lease:
<TABLE>
<CAPTION>
Years Ending June 30 Amount
<S> <C>
1999 $ 30,000
2000 30,000
2001 30,000
2002 30,000
2003 30,000
Thereafter 135,000
</TABLE>
The lease expires December 31, 2007. The Company has an option, upon
notification of the lessor by August 1, 2007, to purchase the building for
$275,000 or to extend the lease for an additional 10 years.
Effective January 1, 2003, and each year thereafter during the term of the lease
or any renewals, there is a cost of living adjustment. In no event will the rent
be less than 30,000 a year. The above schedule does not contain any cost of
living increases.
NOTE 23. SUBSEQUENT EVENTS
In June 1998, the Company opened a newly constructed drive-up teller and
automated teller machine facility on a lot previously purchased for this purpose
adjacent to the present bank building. The facility was completed in July 1998.
On September 14, 1998, the Company moved its loan operations into a new Loan
Center across the street from its office. The Loan Center is leased from a
related party (see Notes 10 and 22). Management believes the additions will
provide the Company growth potential by improving its ability to deliver retail
banking services to the community. Neither of these additions had a material
impact on financial performance for the Company for the fiscal year ended June
30, 1998, but they will have a material impact on non-interest expense for the
Company during the fiscal year ending June 30, 1999 and subsequent years.
<PAGE>
NOTE 23. SUBSEQUENT EVENTS (CONTINUED)
On August 18, 1998, the Company issued a press release announcing its intention
to repurchase up to 5 percent (58,276 shares) of the Company's common stock. The
repurchase was completed on September 9, 1998. On September 9, 1998, the Company
issued a press release announcing its intention to repurchase up to 5 percent
(55,363 shares) of the Company's common stock. As of September 24, 1998, 19,600
shares have been repurchased. All shares repurchased have been retired as
authorized but unissued. The Company believes that it has sufficient capital to
complete the repurchase and that the repurchase will not cause the Bank to fail
to meet its regulatory capital requirements.
<PAGE>
OFFICE LOCATION AND OTHER CORPORATE INFORMATION
CORPORATE OFFICE
GFSB Bancorp, Inc.
221 West Aztec Avenue
Gallup, New Mexico 87301
Board of Directors of GFSB Bancorp, Inc.
<TABLE>
<CAPTION>
<S> <C>
Wallace R. Phillips, D.D.S., Chairman
George S. Perce, Secretary Vernon I. Hamilton
Charles L. Parker, Jr., Treasurer Richard C. Kauzlaric
James Nechero, Jr., Assistant Secretary Michael P. Mataya
Executive Officers of GFSB Bancorp, Inc.
Jerry R. Spurlin, President
William W. Head, Jr., Chief Lending Officer
Marshall W. Coker, Chief Administrative Officer
Special Counsel: Independent Auditors:
Malizia, Spidi, Sloane & Fisch, P.C. Neff & Company LLP
One Franklin Square 7001 Prospect Pl., NE
1301 K. Street, NW, Suite 700 East Albuquerque, NM 87110
Washington, D.C. 20005
Transfer Agent and Registrar:
Registrar & Transfer Co.
10 Commerce Drive
Cranford, New Jersey 07016
</TABLE>
The Company's Annual Report for the year ended June 30, 1998 filed with the
Securities and Exchange Commission on Form 10-KSB is available without charge
upon written request. For a copy of the Form 10-KSB or any other investor
information, please write or call the Secretary of the Company, at the Company's
corporate office in Gallup, New Mexico. The annual meeting of stockholders will
be held on October 28, 1998.
EXHIBIT 23.1
<PAGE>
[Neff & Company, LLP letterhead]
Consent of Independent Accountants
Board of Directors
GFSB Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No.
333-07131) on Form S-8 of GFSB Bancorp, Inc. of our report dated August 14,
1998, relating to the consolidated statement of financial condition of GFSB
Bancorp, Inc. as of June 30, 1998, and the related consolidated statements of
earnings, changes in stockholders' equity and cash flows for the year ending
June 30, 1998, which report appears in the June 30, 1998 annual report on Form
10-KSB of GFSB Bancorp, Inc.
/s/ Neff & Company, LLP
September 28, 1998
Albuquerque, New Mexico
EXHIBIT 23.2
<PAGE>
[Atkinson & Co., Ltd. letterhead]
Consent of Independent Accountants
Board of Directors
GFSB Bancorp, Inc.
We consent to incorporation by reference in the registration statement (No.
33-07131) on Form S-8 of GFSB Bancorp, Inc. of our report dated August 11, 1997,
relating to the consolidated statements of earnings, changes in stockholders'
equity and cash flows for the year ending June 30, 1997, for GFSB Bancorp, Inc.
which report appears in the June 30, 1998 annual report on Form 10-KSB of GFSB
Bancorp, Inc.
/s/ Atkinson & Co., Ltd.
September 28, 1998
Albuquerque, New Mexico
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM THE ANNUAL
REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,047
<INT-BEARING-DEPOSITS> 2,490
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,188
<INVESTMENTS-CARRYING> 4,141
<INVESTMENTS-MARKET> 5,188
<LOANS> 75,837
<ALLOWANCE> 387
<TOTAL-ASSETS> 123,161
<DEPOSITS> 69,379
<SHORT-TERM> 38,248
<LIABILITIES-OTHER> 1,326
<LONG-TERM> 0
0
0
<COMMON> 114
<OTHER-SE> 14,095
<TOTAL-LIABILITIES-AND-EQUITY> 123,161
<INTEREST-LOAN> 5,590
<INTEREST-INVEST> 2,493
<INTEREST-OTHER> 176
<INTEREST-TOTAL> 8,259
<INTEREST-DEPOSIT> 3,092
<INTEREST-EXPENSE> 5,009
<INTEREST-INCOME-NET> 3,250
<LOAN-LOSSES> 63
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,874
<INCOME-PRETAX> 1,416
<INCOME-PRE-EXTRAORDINARY> 1,416
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 877
<EPS-PRIMARY> .79
<EPS-DILUTED> .76
<YIELD-ACTUAL> 3.25
<LOANS-NON> 707
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 369
<CHARGE-OFFS> 19
<RECOVERIES> 4
<ALLOWANCE-CLOSE> 387
<ALLOWANCE-DOMESTIC> 387
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
